Question #84
Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers
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Question
How do the risk-return characteristics of a newly issued convertible bond compare with the risk-return characteristics of ownership of the underlying common stock? The convertible bond has:
Answer Choices:
A. higher risk and higher return potential
B. lower risk and lower return potential
C. lower risk and higher return potential. Explanation Buying convertible bonds in lieu of direct stock investing limits downside risk due to the price floor set by the straight bond value. The cost of the risk protection is the reduced upside potential due to the conversion premium. (Module 27.8, LOS 27.q)
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