Which of the following characteristics are drawbacks of convertible bonds?
A) Downside protection is ineffectual if the bond is bought at a large premium over floor value.
B) Interest rates on the debt-instrument part of a convertible bond are frequently below market interest rates.
C) Conversion may be forced on the bondholder by call provisions on the convertible bond.
D) All of these options are drawbacks of convertibles.

Question

Quizplus · Accepted Answer

All of these options are drawbacks of convertibles. Downside protection may be limited if the bond is purchased at a high premium, the interest rates on the non-convertible portion of the bond may be below market rates, and the bondholder may be required to convert their bond into equity if a call provision is triggered, which can be disadvantageous if the stock price is low at that time.

Which of the Following Characteristics Are Drawbacks of Convertible Bonds