Which one of the following statements related to convertible bonds is correct?

Question

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Convertible bonds have the option to be converted into a predetermined number of shares of the underlying company's stock. This means that if the stock price rises, the bondholder can convert and participate in the upside potential. However, if the stock price falls, the bondholder can simply hold the bond and receive interest payments, limiting their downside risk. Therefore, choice B is the correct statement. The other choices are incorrect. The maximum value of a convertible bond is not equal to its intrinsic value (A), a convertible bond is in the money when its conversion value is greater than its call price (C), convertible bonds do not need to be converted prior to or on the maturity date (D), and convertible bonds do not need to be converted once they are called (E).

Which One of the Following Statements Related to Convertible Bonds