The purchaser of a convertible issue sacrifices a portion of his or her interest return
A) to raise temporarily cheap funds.
B) due to the reduced risk of default.
C) when the call feature is exercised.
D) for the potential opportunity to become a common shareholder in the future.

Question

Quizplus · Accepted Answer

A convertible issue allows the purchaser to convert the bond or preferred stock into common stock of the issuing company. This potentially gives them the opportunity to benefit from future price appreciation of the common stock. However, in exchange for this potential opportunity, the purchaser typically accepts a lower interest rate or lower dividend payment than non-convertible bonds or preferred stock. This sacrifice in interest/dividend return is the portion the purchaser gives up in exchange for the potential opportunity to become a common shareholder in the future.

The Purchaser of a Convertible Issue Sacrifices a Portion of His