Stocks Intermediate: Introduction to Convertibility

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1.
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.
2.
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.
3.
A convertible security is often in the form of _______.
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Preferred stock or corporate bonds. Convertibles are often preferred stocks or bonds that can be exchanged for the companys common stock.
4.
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.
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.