Canadian Securities Course (CSC) Level 1 Practice Exam

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What is a forced conversion related to bonds?

A requirement to increase the bond's face value
Conversion to foreign currencies
Conversion into physical assets
Issuer calling the bond for conversion into common stock

The correct answer is: Issuer calling the bond for conversion into common stock

A forced conversion refers to a situation where a bond issuer requires bondholders to convert their bonds into a predetermined amount of common stock. This typically occurs when the issuer exercises an option to convert the bonds into shares, which is a provision that might be included in certain convertible bonds. In this scenario, the bondholders do not have the option to refuse the conversion; they must comply with the issuer's action. Such provisions can serve various purposes for issuers, including managing debt levels or transforming debt into equity. The other options do not accurately reflect the concept of forced conversion in the context of bonds. Increasing a bond's face value pertains to different aspects of bond terms, while conversion to foreign currencies and physical assets involve entirely different financial processes that do not map onto the concept of bonds being converted into equity.