A convertible bond issue can be thought of as the
A)sale of a straight bond.
B)sale of a straight bond and a call option.
C)sale of a put option.
D)sale of common stock.

Question

Quizplus · Accepted Answer

A convertible bond is a type of bond that can be converted into stock at a predetermined price. Therefore, when a company issues convertible bonds, they are selling a straight bond (which pays interest and principal) and a call option (which gives the bondholder the right to convert the bond into stock at a specified price). This allows the bondholder to benefit if the stock price increases, while still receiving interest payments if the stock price remains stagnant. Option C (sale of a put option) and D (sale of common stock) do not accurately reflect what a convertible bond issue entails.

A Convertible Bond Issue Can Be Thought of as the