Expectations of a significant increase in the price of a firm's common stock will result in
A) large conversion premiums for the firm's convertible bonds.
B) small conversion premiums for the firm's convertible bonds.
C) negative conversion premiums for the firm's convertible bonds.
D) no effect at all on conversion premiums.

Question

Quizplus · Accepted Answer

When expectations of a significant increase in the price of a firm's common stock arise, the value of the option to convert bonds into stock at a predetermined price becomes more valuable. This leads to larger conversion premiums for the firm's convertible bonds, as investors are willing to pay more for the potential upside in the stock price.

Expectations of a Significant Increase in the Price of a Firm's