Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price. To protect itself against this behavior, the firm includes a ________ on the convertible security.
A) warrant
B) option
C) call feature
D) striking price

Question

Quizplus · Accepted Answer

A call feature allows the firm to force the conversion of the convertible security into common stock in certain circumstances, such as when the common stock price exceeds a specified level for a period of time. This protects the firm against investors holding the convertible security and not converting even when it is advantageous for them to do so. A warrant or option is a separate security that gives the holder the right to buy stock at a certain price in the future. The striking price is the price at which the option or warrant can be exercised. None of these directly address the issue of conversion behavior by holders of convertible bonds.

Many Holders of Convertible Bonds Will Not Convert When the Firm's