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

Question

Quizplus · Accepted Answer

When convertible bonds are first issued, the conversion price is typically set higher than the current market price of the stock to make the conversion feature attractive but not immediately beneficial, which is why option I is correct. Additionally, because the convertible feature is valuable to investors, issuers can offer a lower coupon rate compared to a similar non-convertible bond, making option IV correct.

When Convertible Bonds Are First Issued