Answer:
the consol's annual return is 5%.
Step-by-step explanation:
Annual Payment / Current Price = Return, where Annual Payment is the amount that the corporation pays each year, and Current Price is the corporation's present worth.
Annual Payment / Yield to Maturity = Present Value
Given that the convertible debt has a $100 yearly payment and a 10% yield to maturity at the start of the year, the present value of the convertible debt is as follows:
Present Value: 100 / 0.10 = $1000
Similar to this, when the yield to maturity is 5%, the present value of the capital at year's end is:
Present Value: $100 / 0.05 = $2000
As a result, the following formula can be used to get the consol's annual return:
Return = Annual Payment / Current Price Return = $100 / (($1000 + $2000) / 2) = 5%