Which of the Following Statements Is FALSE

question 4

Multiple Choice

Which of the following statements is FALSE?

• A) 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.
• B) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders.
• C) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant.
• D) 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.

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Definitions:

Preferred Stock

A type of ownership in a corporation that has a higher claim on its assets and earnings than common stock, typically with dividends that must be paid out before dividends to common stockholders.

Rate Of Return

A measure of the profit or loss of an investment over a specified period, expressed as a percentage of the investment's initial cost.

Constant Growth

A model assuming a company's dividends will continue to grow at a consistent rate indefinitely.

Dividend

A portion of a company's earnings that is paid to shareholders, usually on a regular basis.