Which of the following is true?
A)As the price of common stock increases, the market price of a convertible bond and the conversion premium increase.
B)As the price of common stock increases, the market price of a convertible bond and the conversion value increase.
C)As the price of common stock increases, the conversion value and the floor price increase.
D)Two of the options.

Question

Quizplus · Accepted Answer

As the price of common stock increases, the market price of a convertible bond and the conversion value increase. The reason for this is that the value of the underlying asset (common stock) is increasing, which in turn increases the value of the convertible bond. The conversion value also increases because it is based on a percentage of the market price of the common stock. Option A is incorrect because the conversion premium actually decreases as the price of the underlying stock increases. Option C is incorrect because the floor price remains the same regardless of the price of the underlying stock. Option D is incorrect because only option B is true.

Which of the Following Is True