1．Which of the following correctly describes one of the basic features of a convertible bond? A convertible bond is a security that can be converted into:

A)   another bond at the option of the issuer.

B)   common stock at the option of the issuer.

C)   common stock at the option of the investor.

D)   another bond at the option of the investor.

2．Which of the following is most accurate concerning a convertible bond? A convertible bond's value depends:

A)   only on interest rate changes.

B)   only on changes in the market price of the stock.

C)   on both interest rate changes and changes in the market price of the stock.

D)   on both interest rate changes and changes in the market price of another bond to which it can be converted.

3．For a convertible bond without any other options, the call feature implied by the convertibility feature will do all of the following EXCEPT:

A)   place a lower limit on the possible values of the bond.

B)   increase the value of the bond over that of a comparable option-free bond.

C)   allow the bondholder to exchange the bond for common shares of the issuer.

D)   cause negative convexity.

4．For a convertible bond, which of the following is least accurate?

A)   A convertible bond may be putable.

B)   A convertible bond may be callable.

C)   The conversion ratio times the price per share of common stock is a lower limit on the bond's price.

D)   The issuer can decide when to convert the bonds to stock.

5．A convertible bond has a conversion ratio of 12 and a straight value of $1,010. The market value of the bond is $1,055, and the market value of the stock is $75. What is the market conversion price and premium over straight value of the bond?

A)   Market conversion price = $87.92; Premium over straight value = 0.0446.

B)   Market conversion price = $75.00; Premium over straight value = 0.1029.

C)   Market conversion price = $84.17; Premium over straight value = 0.1222.

D)   Market conversion price = $45.00; Premium over straight value = 0.0711.

1．Which of the following correctly describes one of the basic features of a convertible bond? A convertible bond is a security that can be converted into:

A)   another bond at the option of the issuer.

B)   common stock at the option of the issuer.

C)   common stock at the option of the investor.

D)   another bond at the option of the investor.

The correct answer was C)

The owner of a convertible bond can exchange the bond for the common shares of the issuer.

2．Which of the following is most accurate concerning a convertible bond? A convertible bond's value depends:

A)   only on interest rate changes.

B)   only on changes in the market price of the stock.

C)   on both interest rate changes and changes in the market price of the stock.

D)   on both interest rate changes and changes in the market price of another bond to which it can be converted.

The correct answer was C)

The value of convertible bond includes the value of a straight bond plus an option giving the bondholder the right to buy the common stock of the issuer. Hence, interest rates affect the bond value and the underlying stock price affects the option value.

3．For a convertible bond without any other options, the call feature implied by the convertibility feature will do all of the following EXCEPT:

A)   place a lower limit on the possible values of the bond.

B)   increase the value of the bond over that of a comparable option-free bond.

C)   allow the bondholder to exchange the bond for common shares of the issuer.

D)   cause negative convexity.

The correct answer was D)

Negative convexity is caused by the bond being callable where the issuer has the embedded call option. Negative convexity does not apply to convertible bonds. The convertibility feature gives the bondholder a call option on the shares of common stock of the issuer. This increases the price of the bond and places a lower limit on the possible values of the bond. However, that lower limit will change with the price of the common stock.

4．For a convertible bond, which of the following is least accurate?

A)   A convertible bond may be putable.

B)   A convertible bond may be callable.

C)   The conversion ratio times the price per share of common stock is a lower limit on the bond's price.

D)   The issuer can decide when to convert the bonds to stock.

The correct answer was D)

All of these are true except the possibility of the issuer to force conversion. The bondholder has the option to convert.

5．A convertible bond has a conversion ratio of 12 and a straight value of $1,010. The market value of the bond is $1,055, and the market value of the stock is $75. What is the market conversion price and premium over straight value of the bond?

A)   Market conversion price = $87.92; Premium over straight value = 0.0446.

B)   Market conversion price = $75.00; Premium over straight value = 0.1029.

C)   Market conversion price = $84.17; Premium over straight value = 0.1222.

D)   Market conversion price = $45.00; Premium over straight value = 0.0711.

The correct answer was A)

The market conversion price is

(market price of the bond)/(conversion ratio)=$1,055/12=$87.92.

The premium over straight price is

(market price of bond)/(straight value)-1=($1,055/$1,010)-1=0.0446.