When Convertible Bonds Are First Issued

question 64

Multiple Choice

When convertible bonds are first issued
I. the conversion price of the stock is higher than the market price.
II. the market price of the stock is higher than the conversion price.
III. the coupon rate is higher than if the bond were not convertible.
IV. the coupon rate is lower than if the bond were not convertible.

• A) I and III only
• B) II and IV only
• C) I and IV only
• D) II and III only

---

Definitions:

Risk Premiums

The additional returns that an investor expects to receive from an investment to compensate them for higher risk.

Earning Power

An indication of a company's ability to generate profit from its operations, often used by investors to assess financial health.

Inflation

The rate at which the typical cost levels of goods and services elevate, undermining the power to buy.

Real Rate

The interest rate adjusted for inflation, providing a more accurate indication of the borrowing cost or investment return in terms of real purchasing power.