Stocks Intermediate: Introduction to Convertibility

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1.
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.
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.
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.
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.
5.
A company usually issues convertible bonds at a higher interest rate than that of regular bonds.
Choose wisely. There is only one correct answer.
False. The rate is usually lower. The convertibility feature is attractive enough in itself to allow the company to offer a lower rate.