Canadian Securities Course (CSC) Level 1 Practice Exam

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What is a convertible bond?

  1. A bond that changes interest rates periodically

  2. A bond issued by convertible companies

  3. A bond with no fixed maturity date

  4. A bond that can be converted to common stock

The correct answer is: A bond that can be converted to common stock

A convertible bond is a type of bond that gives the bondholder the option to convert the bond into a specified number of shares of common stock of the issuing company. This provides the bondholder with the potential to benefit from any capital appreciation in the common stock if the stock price rises, while still receiving interest payments as a bondholder. This feature makes convertible bonds attractive to investors looking for a fixed income investment with the potential for equity upside. The other options are incorrect because: A. A bond that changes interest rates periodically refers to a floating-rate bond, not a convertible bond. B. The issuance of a bond by convertible companies is not a defining characteristic of convertible bonds. C. A bond with no fixed maturity date is known as a perpetual bond, not a convertible bond.

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