2.2 Convertible Securities

Question 1

convertible bonds

Answer 1

At issuance, convertible bonds will typically have a lower yield to maturity than the corporation’s nonconvertible unsecured debt.

When the value of the underlying common stock increases, the price of convertible bonds will increase.

Convertible bonds offer investors a fixed interest rate and the opportunity for equity capital appreciation.

Question 2

describes downside risk with respect to convertible bonds?

Answer 2

Downside risk with respect to convertible bonds is the difference between the current market value of the bond and its investment value

Question 3

An investor pays a premium for a convertible bond because

Answer 3

the investor is buying a straight bond and buying a call option.

Question 4

A convertible bond’s market value will NOT fall below

Answer 4

The answer is its investment value. A convertible bond’s market value will not fall below its investment value

Question 5

advantages of convertible bonds

Answer 5

have a higher coupon rate than the underlying stock’s dividend.

they are normally not converted.

they lack the downside risk protection for investors.

because they are not callable, convertible bonds must be held until maturity.