Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because
A) the common stock price may go up further.
B) they already have the market price benefit and may still receive fixed periodic interest payments.
C) of the dilution of EPS.
D) interest payments are tax deductible.

Question

Quizplus · Accepted Answer

Holders of convertible bonds receive the benefit of having the option to convert to common stock if the price exceeds the conversion price, but they may choose not to convert if they prefer to continue receiving fixed periodic interest payments. They already have benefitted from the market price appreciation of the common stock, and converting would forfeit this benefit. Dilution of EPS (choice C) is a potential concern for the issuing company, but not necessarily for the bondholders themselves. Interest payments being tax deductible (choice D) is a factor for the issuing company, but not a consideration for the bondholders. Choice A is not a relevant factor in this decision.

Many Holders of Convertible Bonds Will Not Convert When the Firm's