Running the Upside/Downside Scenarios

Prospective investors in Juniper had a fascinating alternative. They could buy a stock that had grown by a factor of more than 20 in its first nine months, knowing that anything capable of moving like that can easily go much higher and much lower without too much provocation. Or, they could buy a convertible bond. Let’s say, for the sake of argument, that Juniper’s market value could easily be either five times its current level, or one fifth of that level. I could easily have picked more extreme numbers, but these should be sufficient.

It’s easy to see how you do with the stock in either case. What about the convertible? Well, with the stock quintupling, you’d have a share price of $260.25×5, or $1301.25. Multiplying that by the conversion ratio of 3.05 produces a convertible price per $1,000 of $3,968.81. Calling upon Mr. Verity’s evil twin, who likes to divide by 10, we see that the way bonds are quoted (on a base of 100 not 1,000), an initial investment of 100 would turn into 396.88, or a near-quadruple. Once you include the 4.75% annual interest for three years¹⁵—admittedly small potatoes compared with the stock gain, but real money nonetheless—your initial 100 turns into about 410. Compare this gain of 310 with the stipulated gain of 400 in the stock (a quintupling), and you’ll see that the convertible would participate in about 78% of the stock’s massive upside.