Which of the following statements about convertible bonds are true?
I. The conversion price does not change over time.
II. The associated stocks may not pay dividends as long as the bonds are outstanding.
III. Most convertibles are also callable at the discretion of the firm.
IV. They may be thought of as straight bonds plus a call option.
A) I and III only
B) I and IV only
C) I, II, and IV only
D) III and IV only

Question

Quizplus · Accepted Answer

III and IV are true. Convertible bonds are often callable, allowing the issuing company to force conversion or redemption before maturity under certain conditions. They can also be viewed as a combination of a straight bond and a call option on the company's stock, giving the bondholder the right to convert the bond into a predetermined number of shares of the company's stock. The conversion price is typically fixed at issuance, but this does not mean it cannot change under certain conditions like stock splits or dividends, making statement I incorrect. Statement II is incorrect because the payment of dividends on the associated stocks is independent of the status of the bonds.

Which of the Following Statements About Convertible Bonds Are True