Stocks Intermediate: Introduction to Convertibility

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1.
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.
2.
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.
3.
Convertible securities are often more marketable than straight securities because investors ________.
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Are attracted to the convertibility feature. To obtain the convertibility feature, many investors are willing to pay a premium.
4.
With a convertible bond, the conversion ratio defines _______.
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The relationship between the par value of the bond and the number of shares for which it can be exchanged. Investors use the ratio to determine whether the convertible bond is a good deal for them.
5.
Unlike common stock, convertible securities generally offer a regular income.
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True. Convertibles offer regular incomeguaranteed either as dividends in the case of preferred stock or interest in the case of bonds.