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:

Investment Turnover

A measure of a company's efficiency in using its assets to generate sales or revenue; the ratio of sales to investment in assets.

Income From Operations

The profit realized from a business's ongoing, core business activities, excluding deductions of interest and taxes.

Invested Assets

Resources or funds committed to investments in securities, real estate, or other vehicles with the expectation of earning returns.

Negotiated Price

The final price agreed upon by both the buyer and the seller after a process of negotiation, which may involve discounts or modifications from the original price.