Stocks Intermediate: Introduction to Convertibility

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1.
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.
2.
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.
3.
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.
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.
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.