10.3% Bond Yield To Maturity And 30% Capital Appreciation Potential From A Clear Arbitrage With Hedging Reaction

The idea of ML Depositor PPLUS Trust 6.30% R.R. Donnelley (RRD) Certificates, RRD-1 (PYS), is probably clear to all of my readers, but here is the summary.
In short, PYS is a third-party trust that holds RRD bonds. The yield to maturity of the bonds is 6.7% at a price of 97.5% of Par, while the yield to maturity of PYS is around 10.30% at a price of 18.60. The trust holds $60 mln nominal value of the bonds currently valued at $58.5 mln. There are 2.4 mln shares of PYS outstanding, so the simple calculation of net asset value per share is $24.37. PYS currently trades at $18.60, and we have been trying to find the reason for the last several months. Well, we failed.
Before starting with PYS, I want to share with my readers some very profitable pair traders we did recently based on articles or ideas published on SA. The idea here is not to show off (because we have losing picks as well), but just to remind the public that financial logic sooner or later prevails:
Arbitrage in baby bonds vs. preferred stock

Result so far

This one was really profitable for arbitrage trading:
Preferred stock vs. preferred stocks

The result

This one was not profitable for arbitrage trading because of very high hard-to-borrow fees even though the idea looks perfect on the chart.
And a one that includes a third-party trust vs. underlying bonds that was available only to my chat subscribers:

And the yield comparison to underlying bonds... Read more

Older articles featuring RRD: