Canadian Securities Course (CSC) Level 1 Practice Exam

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What is forced conversion regarding bonds?

When bondholders request conversion into common stock
When the issuer calls the bond for conversion into common stock
When the bond reaches maturity
When the bond becomes callable

The correct answer is: When the issuer calls the bond for conversion into common stock

Forced conversion regarding bonds refers to when the issuer calls the bond for conversion into common stock. In this scenario, the issuer has the right to force bondholders to convert their bonds into common stock at a predetermined conversion price and ratio. This action is initiated by the issuer and not the bondholders themselves. Options A, C, and D are incorrect because they do not accurately define forced conversion. Option A states that forced conversion occurs when bondholders request conversion into common stock, which is not the case for forced conversion. Option C mentions when the bond reaches maturity, which is a different event from forced conversion. Option D refers to when the bond becomes callable, which is also a separate concept from forced conversion.