Real-Life Math
You just can't do business as a stockbroker without math skills.
After all, how are you going to know how much your client made if you can't
do the math?
A client comes in to visit you. A number of years ago,
she bought a $1,000 convertible debenture from the car company, GEM
Motors.
A convertible debenture is a type of corporate debt. This type
of debenture pays a fixed interest rate and has a specified date at which
the debt must be repaid. It also allows the person holding the debenture to
convert the debenture into common shares at a stated price. In this case,
the client can convert the debenture into 140 common shares.
Your client
has decided that she will convert the debenture into common shares of GEM
Motors. People who own common shares are owners of a company. If the company
is doing well, the common shareholders benefit by collecting income known
as dividends. If the company is losing money, the shareholders are losing
their investment.
You check the market and find out that the debenture
trades at 111 1/4 and the common shares trade at 7 4/5. (In everyday lingo,
that means that the debenture is trading for 1.1125 and the common shares
trade for 7.80.) How much money will your client lose (or have
to pay for the privilege) for converting the debenture into common shares?
Hint:
Find the market price of the client's debenture and the shares, and then subtract.