Which of the following is true of conversion feature of a bond?
A) It adds a degree of speculation to a bond issue, although the issue still maintains its value as a bond.
B) It decreases the marketability and liquidity of a bond since conversion feature is perceived by the market as a pessimistic approach about the firm's future.
C) It is analogous to the put option, since it gives the bondholders the option to sell the bonds at any time till maturity.
D) It increases the cost of debt financing.

Question

Quizplus · Accepted Answer

Conversion feature adds an option for bondholders to convert their bonds into a predetermined number of shares of the issuer's common stock. This can increase the attractiveness of the bond to investors who believe the stock price will appreciate in the future. However, it also adds a degree of speculation, as bondholders may choose to convert based on their views of the market and the issuer's stock performance. Nonetheless, the bond still maintains its value as a bond, as investors can choose to hold the bond until maturity and receive the principal and coupon payments.

Which of the Following Is True of Conversion Feature of a Bond