The Conversion Premium Is the Greatest and the Downside Risk

question 37

Multiple Choice

The conversion premium is the greatest and the downside risk the smallest when

• A) the conversion value equals the pure bond value.
• B) the conversion value is greater than the pure bond value.
• C) the conversion value is less than the pure bond value.
• D) the stock price is expected to go up drastically.

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Definitions:

Depreciated Straight-line

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts, representing its gradual loss of value.

Payback

The period of time it takes for an investment to generate an amount of money equal to the initial cost of the investment.

Time Value

The belief that money available now is worth more than an identical amount in the future because of its potential earning power.

Relevant Cash Flows

Cash flows that will only occur as a result of undertaking a project or investment.