Stocks Intermediate: Introduction to Convertibility

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1.
A convertible security usually may be exchanged for a set number of shares of common stock at a set price.
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True. When a company issues convertibles, it sets the number and price at which the conversion can take place.
2.
Compared to a companys common stock, its convertibles generally are less volatile.
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True. If the companys common stock price declines, the price of its convertibles usually will not fall as far.
3.
Convertibles generally offer potentially higher earnings than a companys common stock.
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False. Convertibles generally offer potentially lower earnings than a companys common stock. They can do this because the chance to convert is an acceptable tradeoff.
4.
A company usually issues convertible bonds at a higher interest rate than that of regular bonds.
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False. The rate is usually lower. The convertibility feature is attractive enough in itself to allow the company to offer a lower rate.
5.
The conversion price is set when the company issues the convertibles.
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True. When the company issues a convertible, it sets the conversion price.