When a call is made on a convertible security, the holder of the security will most likely ________.
A) not take any action
B) allow the call to be exercised and accept the call premium if the conversion value is 10% above the call price
C) convert the security into common stock if the conversion value is 10% above the call price
D) sell the security in the secondary market

Question

Quizplus · Accepted Answer

When the conversion value of a convertible security is 10% above the call price, it is generally more advantageous for the holder to convert the security into common stock rather than allowing the call to be exercised or taking other actions. This is because converting allows the holder to benefit from the higher value of the underlying stock, rather than just receiving the call premium or selling the security at market value.

When a Call Is Made on a Convertible Security, the Holder