The Price of a Convertible Bond Increases When

question 19

Multiple Choice

The price of a convertible bond increases when
1. interest rates rise
2. interest rates fall
3. the price of the stock rises
4. the price of the stock falls

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

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Definitions:

After-Tax Cost of Debt

The net cost of debt to a company after accounting for the tax deductions on interest payments, effectively lowering the interest expense.

Bond Prices

The market value of a bond, which can fluctuate based on interest rates, credit quality of the issuer, and other factors.

Security Market Line

A representation in the Capital Asset Pricing Model (CAPM) showing the relationship between the expected return of a security and its risk, measured by beta.

Marginal Tax Rate

The rate at which the next dollar of taxable income would be taxed, reflecting the percentage taken by taxes in the next higher tax bracket.