Question

If the price of the common stock should decline by 50 percent, would the price of the convertible bond decline by the same percentage? briefly explain your answer

Answer 1

If the price of the common stock declines by 50 percent, the price of the convertible bond will also decline by the same percentage

If the stock price falls, the short seller profits by buying the stock at the lower price closing out the trade. Convertible bonds tend to offer a lower coupon rate or rate of return in exchange for the value of the option to convert the bond into common stock.

Thus, if the price of a convertible bond will move in tandem with the price of the common stock, so if the stock price declines, the convertible bond price will follow suit.

Hence, convertible bonds typically carry lower interest rates payments.

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