SIE practice questionhardConvertible Bonds
A convertible bond is trading above parity. What does this mean for arbitrageurs?
- AThe conversion feature is useless
- BNo arbitrage profit is possible
- CThe bond is undervalued
- DPotential arbitrage profit exists✓ Correct answer
Explanation
Why D — Potential arbitrage profit exists
If a bond trades above its parity value, arbitrageurs can buy stock and convert, capturing profit. Below parity, conversion is unattractive.
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