owner of a convertible bond owns, in effect, both a bond and a call option.

Question

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A convertible bond can be converted into a predetermined number of shares of the company's common stock at the bondholder's discretion. This embedded call option gives the bondholder the right to benefit from any potential appreciation in the company's stock price. Additionally, the bondholder still receives regular bond interest payments until conversion, giving them the benefits of owning both a bond and a call option.

Owner of a Convertible Bond Owns, in Effect, Both a Bond