Which of the following is a characteristic of convertible bonds?
A) Conversion increases a firm's debt ratio.
B) It is a more expensive form of financing than straight bonds.
C) It enhances marketability of a firm's bonds.
D) It is nothing but a put option.

Question

Quizplus · Accepted Answer

Convertible bonds have a feature that allows the bondholders to convert their bond into a predetermined number of shares of the issuing company's stock. This feature enhances marketability of the bonds, as investors are willing to pay a premium for the option to convert the bond into equity. Choosing A, B, or D is incorrect because the conversion of the bonds into equity reduces the debt outstanding, making the company's debt ratio decrease, it is not necessarily a more expensive form of financing, and it is not the same as a put option.

Which of the Following Is a Characteristic of Convertible Bonds