Question

If convertible bonds were issued at a discount, when computing diluted EPS, the amortization of the bond discount: Multiple Choice Will increase the numerator. Will decrease the numerator. Will have no effect. May increase or decrease the numerator, depending on the amortization method used.

Answer 1

Answer: Option 1

Explanation:

If the convertible bonds are issued at discount then it will increase the numerator. Convertible bonds yields a fixed interest income. When the convertible bonds are issued at a discount then they can be converted into shares and discount is considered in the purchasing price of the stock.

In amortized bond the each payment goes towards the interest as well as the principle amount. Amortization reduces the credit risk as the principle is repaid on maturity or on default of the firm.