If you purchased a convertible bond when first issued, you would pay more for the shares of stock you are entitled to than if you purchased the shares directly on the market at that point in time.

Question

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This is because the convertible bond gives the investor the option to convert the bond into a specified number of shares of stock at a predetermined price (known as the conversion price). If the price of the stock increases above the conversion price, the investor can buy the shares at a lower price through the conversion option, rather than buying the shares directly on the market at the higher price. Therefore, investors are willing to pay a premium for the convertible bond due to the potential benefit of the conversion option.

If You Purchased a Convertible Bond When First Issued, You