Which of the following statements are correct concerning convertible bonds?
I.New shares of stock are issued when a convertible bond is converted.
II.A convertible bond is similar to a bond with a call option.
III.A convertible bond should always be worth less than a comparable straight bond.
IV.A convertible bond can be described as having upside potential with downside protection.

Question

Quizplus · Accepted Answer

Statement I is correct as convertible bonds can be converted into new shares of stock.
Statement II is correct as the option to convert the bond into stock is similar to a call option.
Statement III is incorrect as convertible bonds typically have a higher value than comparable straight bonds due to their additional conversion feature.
Statement IV is correct as convertible bonds offer potential for gains from the stock option while still providing the downside protection of a bond.

Which of the Following Statements Are Correct Concerning Convertible Bonds