Stocks Intermediate: Introduction to Convertibility

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1.
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.
2.
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.
3.
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.
4.
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.
5.
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.