Which of the Following Statements Regarding Convertible Bonds Is FALSE

question 6

Multiple Choice

Which of the following statements regarding convertible bonds is FALSE?

• A)A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant.
• B)On the maturity date of the bond,the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is,the conversion price.
• C)Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders.
• D)If the stock price is low so that the embedded warrant is deep out-of-the-money,the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision.

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Definitions:

Variable Costing

An accounting method that only considers variable costs (costs that change with production volume) in product pricing and decision making.

Unit Product Cost

The cumulative expense of manufacturing a single product unit, encompassing direct materials, direct labor, and overhead costs.

Operating Income

This represents the earnings before interest and taxes (EBIT) derived from a company's principal operating activities.

Year 2

Refers to the second year of a specific time frame, project, or financial period.