An investor can acquire shares of stock in Acme Corporation either by purchasing shares on the stock market or by purchasing a bond that is convertible into shares of Acme stock. After careful study, the investor discovers that she can profit by purchasing the bond, converting it to shares of stock, and selling the stock. This practice is called:

Question

Quizplus · Accepted Answer

This practice is called arbitrage, which involves buying an asset in one market and selling it for a higher price in another market to make a profit. In this case, the investor is buying a bond that is undervalued relative to the stock, then converting it into stock and selling it for a profit.

An Investor Can Acquire Shares of Stock in Acme Corporation