Exam 16: Convertible Bonds and Convertible Preferred Stock

As the price of the stock rises, the probability that a convertible bond will be called increases.

When a convertible bond is called, 1. interest ceases to accrue 2. the bondholder receives the principal 3. the bondholder generally converts the bond 4. dividends are paid to the bondholder

A put bond permits

As the price of common stock rises,

If the price of common stock falls, the value of a convertible preferred stock will also tend to fall.

The value of a convertible bond as a debt instrument sets a floor (i.e., the minimum price)for the bond.

Convertible preferred stock may be converted into debt.

The longer it takes to overcome the capital gains advantage to a stock, the less attractive is a convertible bond.

If the value of the stock rises, the value of a convertible bond falls.

Convertible preferred stock is usually less risky to investors than the firm's convertible bonds.

As interest rates increase, the probability that a convertible bond will be called declines.

A convertible bond's payback period 1. increases as the bond's coupon increases 2. decreases as the bond's coupon increases 3. increases as the stock's dividend increases 4. decreases as the stock's dividend increases

A convertible bond's value fluctuates with the price of the stock into which the bond may be converted.

The value of a convertible bond as stock depends on the 1. current rate of interest 2. number of shares into which it is convertible 3. price of the stock

A put bond permits the investor to sell the bond back to the issuer (i.e., redeem the bond)at par prior to maturity.

If a $1,000 convertible bond may be converted into 25 shares, the exercise (conversion)price is $40 a share.

The value of a convertible bond as debt does not depend on

If interest rates fall, the investor will not exercise the option in a put bond.

Convertible preferred stock 1. pays a fixed dividend 2. pays a variable dividend 3. may be converted into the firm's bonds 4. may be converted into the firm's stock

A $50 par value convertible preferred stock is convertible into 5 shares (exercise price of $10). The preferred is selling for $75, and the price of the common stock is $12.If the price of the common stock rises to $20, what is the minimum percentage price increase the holder of the preferred stock should experience?