Certified Compensation Professional (CCP) Accounting & Finance for the HR Professional Practice Exam

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What is a defining feature of convertible bonds?

They pay no interest

They can be converted into common shares at specific prices

Convertible bonds are distinct in that they provide the bondholder with the option to convert their bonds into a predetermined number of common shares of the issuing company, typically at a specific conversion price. This feature allows investors to participate in the potential upside of the company's stock while initially receiving the security of a bond. The ability to convert provides a strategic advantage, as bondholders can benefit from equity appreciation without needing to purchase stock directly.

This feature of convertibility is what sets these bonds apart from traditional fixed-income securities, offering a blend of characteristics from both bonds and stocks. The investor has a fixed income from interest payments, while also having the potential to profit from equity gains if the company's stock performs well.

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They are always sold at a premium

They offer variable rates of return

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