Which of the following is true?
A) As the price of common stock increases, the market price of a convertible bond and the conversion premium increase.
B) As the price of common stock increases, the market price of a convertible bond and the conversion value increase.
C) As the price of common stock increases, the conversion value and the floor price increase.
D) Two of the options are true.

Question

Quizplus · Accepted Answer

As the price of common stock increases, the conversion value of a convertible bond (the value at which it can be converted into stock) increases. This increases the attractiveness of the bond and therefore increases its market price. However, the conversion premium (the extra amount above the conversion value that investors pay for the bond) will decrease as the bond becomes more valuable.

Which of the Following Is True