The lower bound on the market price of a convertible bond is
A)its straight-bond value.
B)its crooked-bond value.
C)its conversion value.
D)its straight-bond value and its conversion value.

Question

Quizplus · Accepted Answer

The lower bound on the market price of a convertible bond is its straight-bond value and its conversion value. The straight-bond value represents the minimum value of the convertible bond, assuming that it was issued as a traditional bond without the conversion feature. The conversion value represents the minimum value of the bond if the holder exercises the conversion option and receives the underlying stock. Therefore, the market price of the convertible bond cannot fall below the sum of its straight-bond value and its conversion value.

The Lower Bound on the Market Price of a Convertible