Which of the following is most likely to happen with a convertible bond when the market price of the stock exceeds the conversion price? The stock does not pay a dividend.
A) The bondholders will immediately convert their bonds to stock.
B) The issuing company will call the bonds and the bondholders will redeem them for the call price.
C) The issuing company will call the bonds and bondholders will convert them to common shares.
D) Both the issuing company and the bondholders will wait for the bonds to reach their maturity date.

Question

Quizplus · Accepted Answer

When the market price of the stock exceeds the conversion price, it becomes advantageous for bondholders to convert their bonds into stock to potentially gain more from the stock's appreciation. If the issuing company has the option to call the bonds (and it often does in such scenarios to reduce interest expenses or dilution from conversion), it may do so, prompting bondholders to convert their bonds to shares rather than redeem them for the call price, especially if the stock does not pay dividends and its value exceeds the call price.

Which of the Following Is Most Likely to Happen with a Convertible