Convertibles

### What are convertibles in the context of corporate securities? - [ ] Common shares that pay regular dividends. - [x] Corporate securities that can be exchanged for a set number of another form, usually common shares, at a prestated price. - [ ] Government bonds with a fixed interest rate. - [ ] Corporate bonds issued by tech companies. > **Explanation:** Convertibles are corporate securities, which are often preferred shares or bonds, that can be exchanged for a set number of common shares at a prestated price. ### What is the primary benefit for a company issuing convertible bonds? - [ ] Higher interest rates - [ ] Decreased stock valuation - [x] Attracting investors with lower interest rates compared to traditional bonds - [ ] Making the company's debt structure more complex > **Explanation:** Companies can offer convertible bonds with lower interest rates than traditional bonds because of the added value of the conversion option. ### What does the conversion price represent? - [ ] The price at which a bond was initially issued. - [ ] The current market price of the company's stock. - [x] The predetermined price at which the security can be converted into common shares. - [ ] The price of preferred shares. > **Explanation:** The conversion price is the predetermined price at which the convertible security can be exchanged for common shares. ### How is the conversion ratio calculated? - [ ] By multiplying the face value of the bond by the stock price. - [ ] By dividing the stock price by the bond's maturity value. - [x] By dividing the par value of the convertible security by the conversion price. - [ ] By adding the interest rate to the stock price. > **Explanation:** The conversion ratio is calculated by dividing the par value of the convertible security by the conversion price. ### What is the key difference between a convertible bond and a traditional bond? - [ ] Convertible bonds cannot be traded on the market. - [ ] Traditional bonds offer lower interest rates. - [x] Convertible bonds can be converted into a set number of common shares. - [ ] Convertible bonds have a longer maturity period. > **Explanation:** The key difference is that convertible bonds can be exchanged for a set number of common shares, while traditional bonds cannot. ### Who usually benefits from the conversion feature of a convertible security? - [ ] The issuing company only. - [ ] The government. - [ ] All debenture holders. - [x] Investors who hold the convertible security. > **Explanation:** Investors benefit from the option to convert the security into common shares, potentially gaining from the increased stock value. ### Which of the following represents a potential drawback for companies issuing convertibles? - [ ] Reduced access to equity markets - [ ] Increased short-term debt obligations - [x] Potential dilution of existing shareholders' equity - [ ] Higher initial bond issuance costs > **Explanation:** The potential conversion of convertibles into equity may dilute existing shareholders' equity, affecting their ownership percentage. ### What type of income do holders of convertible bonds receive before conversion? - [x] Regular interest payments - [ ] Share dividends - [ ] Capital gains - [ ] Deferred dividends > **Explanation:** Convertible bondholders receive regular interest payments until they decide to convert the bonds into common shares. ### Can convertible preferred shares typically be converted into bonds? - [x] No, they are typically converted into common shares. - [ ] Yes, if specified by the company. - [ ] It depends on the current stock market conditions. - [ ] Only by mutual funds. > **Explanation:** Convertible preferred shares are typically converted into common shares, not bonds. ### What is one reason investors might prefer convertibles over common equity? - [ ] Higher guaranteed returns. - [x] The mix of fixed income and equity potential. - [ ] Lower risk than any form of investment. - [ ] Guaranteed capital appreciation. > **Explanation:** Investors might prefer convertibles over common equity due to the mix of fixed income from interest or dividends and the potential for equity conversion gains.