Why should a convertible bond always be valued at more than its bond value or its conversion value up until maturity?
A) The bond holder is receiving higher interest rates.
B) The conversion value does not have an upper bound.
C) The conversion ratio may be decreased.
D)The bond does not have to be given up to exercise the option.

Question

Quizplus · Accepted Answer

A convertible bond always has a fixed bond value, which is the value of the bond if it were not convertible into equity. It also has a conversion value, which is the value of the bond if it were converted to equity at the current stock price. However, the convertible bond typically trades at a premium to both its bond value and its conversion value, because it offers the holder the option to convert the bond into shares of the underlying company. Since the conversion option does not have an upper cap, the value of the option that the bond holder holds increases as the underlying stock price increases. This additional option value is the reason why the convertible bond should always be valued at a premium to its bond and conversion values up until maturity.

Why Should a Convertible Bond Always Be Valued at More