Question #26
Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers
PDF File: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers.pdf
Page: 11
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Question
Which of the following scenarios will lead to a convertible bond underperforming the underlying stock? The:
Answer Choices:
A. stock price is stable
B. stock price falls
C. stock price rises. Explanation A convertible bond underperforms the underlying common stock when that stock increases in value. This is because of the conversion premium which means that the bond will increase less than the increase in stock price. If the stock price falls, the convertible bond should outperform the stock because of the floor created by the straight-value. If the stock is stable, the bond is likely to outperform the stock because of the higher current yield of the bond. If the bond is upgraded, the bond should increase in value. There is no reason that upgrading the bond should lead to the bond underperforming the stock. (Module 27.8, LOS 27.q)
No explanation available for this question.