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✓ Correct answer
- CThe bond is undervalued
- DPotential arbitrage profit exists
Explanation
Why B — No arbitrage profit is possible
If a convertible bond trades above parity, it is priced above its conversion value, so the standard buy-convert-sell arbitrage is not available. Arbitrage is attractive when the convertible is priced below parity.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 1,867+ SIE questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Debt Securities questions
- A major difference between GO and revenue municipal bonds is:
- A 6% corporate bond makes interest payments on Feb 1 and Aug 1. If a customer buys the bond on May 10, how much accrued…
- A 20-year 6% bond is callable in 10 years at 105 and is trading at 108. Which yield is the lowest?
- Which bond type has the highest duration, assuming equal maturities?
- A corporation issues a 10-year bond with a 5% coupon, payable semiannually. Which of the following best describes this…
- A 7% bond maturing in 12 years is priced at 94. What best describes its yield relationships?
- Which municipal bond is primarily backed by the taxing power of the issuer?
- If interest rates fall sharply, which bond feature most likely disadvantages investors?