Which of the following is true?
A) As the price of common stock increases, the market price of a convertible bond and the conversion premium increase.
B) As the price of common stock increases, the market price of a convertible bond and the conversion value increase.
C) As the price of common stock increases, the conversion value and the floor price increase.
D) Two of the above are true.

Question

Quizplus · Accepted Answer

When the price of common stock increases, the market price of a convertible bond also increases because the conversion value of the bond increases. The conversion premium, which is the difference between the market price of the convertible bond and its conversion value, may remain constant or even decrease as the value of the bond increases. Thus, option B is the correct answer. Option A is incorrect because the conversion premium may not increase with the market price of the common stock. Option C is incorrect because the floor price remains constant and is not affected by the price of common stock.

Which of the Following Is True