Question

TRUE OF FALSE: The value of a convertible bond as debt sets the maximum price of the bond.​

Answer 1

Answer:

The value of a convertible bond as debt sets the maximum price of the bond. It's False due to the below reasons.

Convertible bond gives the holder the option to convert or exchange it for a predetermined number of shares in the issuing company, but investor will get less interest on convertible bonds compared to normal bond. The main advantage of a convertible bond is that it provides a better return than a traditional bond without the added risk of the stock market.

The return on a convertible bond generally falls between that of bonds and stocks. This higher return comes from the earnings investors gain when the company stock price rises, and they trade their bond for shares of stock. At face value, the interest rate on a convertible bond is lower than that found on nonconvertible bonds. Investors are willing to accept this lower interest rate in exchange for greater flexibility to transform the bond into shares of stock and for the potential to earn more if stock prices rise

Companies normally issue convertible bonds to lower the coupon rate on debt and to delay dilution and if the price will be maximum price then the investors will not invest in it and company cannot lower the coupon rate on debts and cannot delay dilutions.