Stocks Intermediate: Introduction to Convertibility

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1.
A forced conversion is when a company calls, or redeems, its convertible securities.
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True. This does not happen completely by surprise, however. The possibility of being called is made known when the investors buy the convertibles.
2.
An owner of convertible securities usually can exchange those securities for common stock issued by another company.
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False. An owner of convertible securities can exchange them for the common stock of the same company.
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.
The conversion price is usually lower than the current price of the companys common stock.
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False. The conversion price is usually higher than the current price of the companys common stock.
5.
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.