If the stock price rises substantially above the conversion price, an advantage to the corporation would be
A) the premium would decrease.
B) the floor price would offer the investor downside protection.
C) the bond would most likely be converted into common stock and the debt would not have to be repaid.
D) none of these are advantages to the corporation.

Question

Quizplus · Accepted Answer

If the stock price rises substantially above the conversion price, it is likely that the bondholders will convert their bonds into common stock, which would reduce the amount of debt outstanding and the interest expense the corporation would have to pay. This can ultimately improve the corporation's financial position and decrease its leverage. Therefore, converting the bonds into common stock won't require any repayment of debt and investors will become shareholders. Thus, the answer is C.

If the Stock Price Rises Substantially Above the Conversion Price