Debentures: a Case in Market InefficiencyThe 10% 10/31/15 convertible debentures are trading @ $99, yet the company has announced a fully back-stopped guarantee for the redemption of this security at maturity. Therefore, the stock has the safety of a high grade short-term debt security - yet the yield to maturity is currently sitting at 12.4% - 5% coupon in 5 months (first illustration below). This makes no sense and proves, once again, how the market can be inefficient.
A more reasonable price would be $103. Someone paying $103 today would pay virtually zero accrued interest (semi-annual coupon just payed on 4/30/15) and received $100 at maturity plus $5 coupon. So, they would incur a $3 capital loss but receive $5 - for a $2 net return, or 2.83% annualized yield (second illustration below), or about 250 bps higher than money market.
| Accrued Interest: |
$750.00 |
|
Invoice Price: |
$99,750.00 |
| Yield-to-Maturity: |
12.38 % |
|
Yield-to-Call: |
12.38 % |
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| Purchase Price: |
|
|
Yield-to-Maturity**: |
% |
| Call Price: |
$ |
|
Yield-to-Call**: |
% |
|
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94.496.7699.12101.48103.84
04.949.8814.8219.7624.7029.64
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 |
| Accrued Interest: |
$750.00 |
|
Invoice Price: |
$103,750.00 |
| Yield-to-Maturity: |
2.83 % |
|
Yield-to-Call: |
2.83 % |
|
| Purchase Price: |
|
|
Yield-to-Maturity**: |
% |
| Call Price: |
$ |
|
Yield-to-Call**: |
% |
|
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99.12101.48103.84106.2108.56
-9.12-4.5604.569.1213.6818.24
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