The Price of a Convertible Bond Is Often

question 12

Multiple Choice

The price of a convertible bond is often
1. greater than its value as stock  
2. less than its value as stock
3. greater than its value as debt
4. less than its value as debt

• A)1 and 3
• B)1 and 4
• C)2 and 3
• D)2 and 4

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Definitions:

Pre-Tax Cost of Debt

The interest rate a company pays on its borrowings before taking into account any tax deductions.

Zero-Coupon Bonds

Zero-coupon bonds are debt securities that are issued at a discount to their face value and don’t pay interest before maturity; instead, investors receive the face value at maturity.

Face Value

The nominal or dollar value printed on a bond, bill, or other financial instrument, representing the amount due at maturity.

After-Tax Cost of Debt

The interest rate on a company's debt after taking into consideration the tax deductibility of interest expenses.