A convertible note may be accurately described as:
A) a derivative financial instrument that affords the holder a stream of cash flows and benefits associated with being a shareholder but transfers the risk to the holders of the convertible options.
B) a secondary financial instrument that from the perspective of the issuer contains a contractual obligation to deliver cash and a put option.
C) a simple financial instrument that affords the holder access to a stream of cash flows in the form of either dividends or interest payments.
D) a compound financial instrument that from the perspective of the issuer contains a contractual obligation to deliver cash and a call option.

Question

Quizplus · Accepted Answer

A convertible note is a compound financial instrument that combines a debt instrument (the obligation to repay the principal and interest) with an option to convert the debt into equity (the call option). The holder can choose to convert the note into shares of the company at a predetermined price, usually at a discount to the future share price, which makes it an attractive investment for investors seeking potential upside while limiting downside risk. This means the issuer has a contractual obligation to deliver cash and a call option.

A Convertible Note May Be Accurately Described As