Which of the Following Statements Is True of Convertible Bonds

question 42

Multiple Choice

Which of the following statements is true of convertible bonds?

• A) The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments.
• B) The typical conversion ratio is set so that the firm's stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock.
• C) Firms that issue convertible bonds can do so at a lower interest rate.
• D) The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock.

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Definitions:

Foreign Currency Firm Commitments

Agreements to execute a financial transaction in a foreign currency at a future date, at a predetermined rate or price.

Cash Flow Hedge

A form of hedge accounting that aims to reduce the exposure to variability in cash flows related to a specific risk.

Foreign Currency Option

A financial derivative that gives the holder the right, but not the obligation, to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.

Fair Value

The cost at which one could sell an asset or assume a liability in a structured exchange with market participants on the valuation date.