This month’s study question from the Solomon Online Exam Simulator question database is now available.
As the price of the underlying stock of a convertible debenture goes up:
I. The parity value of the bond increases.
II. The current yield of the bond goes up.
III. The parity value of the bond decreases.
IV. The current yield of the bond goes down.
A. I and III
B. III and IV
C. II and III
D. I and IV
Correct Answer: D. I and IV
Rationale: With a fixed conversion schedule, the parity value of the bond increases along with the price of the underlying stock. Since the nominal yield of the bond is fixed, the current yield, expressed as a percent of the bond’s price, goes down.
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