RE:RE:Another picture - $50m 6% Debentures vs $50m common sharesv_guerriero wrote: I've already explained that someone could synthetically create this debenture:
1. Buy the stock at 2.68
2. collect the dividends 0.25 at the 1.8% annual yield
3. Invest the remainder into a BBB debt ETF at 4.2% (0.55)
This is a profitable trade vs the debenture until 3.25 on the stock. In other words you can short the debenture and do the above and make a risk free profit. Institutions, if they buy, are buying at a much higher price. And in fact, if they are not in a tax advantages structure, the interest income tax would reduce the after tax yield (by 1/2 for the highest marginal tax bracket) meaning the above trade is profitable until 3.50 on the stock.
This isn't exactly right, because you'd have to buy puts on the stock as well for this to be synthetically like the debenture. The debenture doesn't carry downward risk unlike the stock. Obviously, you carry better upside though (from the stock appreciating now vs $3.80).