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 holder can decide later whether to own the bond or the stock.
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 gives the holder the option to convert the bond into a predetermined number of shares at a later date. This option to convert provides added value to the holder, which is reflected in the convertible bond's price. Until maturity, the holder can decide whether to own the bond or convert it into stock, which adds flexibility and makes the convertible bond more valuable than its bond value or conversion value alone. Therefore, option B is the correct answer. The other options do not fully explain why a convertible bond should always be valued higher than its bond or conversion value.

Why Should a Convertible Bond Always Be Valued at More