Which bond characteristic indicates it can be exchanged for stock?

Which bond characteristic indicates it can be exchanged for stock?

• A. Callable
• B. Convertible
• C. Redeemable
• D. Fixed-rate

Answer: (B)

The characteristic that indicates a bond can be exchanged for stock is referred to as "convertible." Convertible bonds are a type of debt security that allow the bondholder the option to convert the bond into a specified number of shares of the issuing company's stock at predetermined times during its life. This feature provides an opportunity for bondholders to benefit from potential increases in the company’s stock price, effectively allowing them to participate in the equity upside while still receiving interest payments as debt holders. In contrast, callable bonds enable issuers to redeem the bonds before their maturity at a predetermined price, which is beneficial for the issuer if interest rates decrease. Redeemable bonds are similar to callable bonds but typically allow the investor to sell their bond back to the issuer under certain conditions. Fixed-rate bonds simply have a constant interest rate throughout their lifespan and do not provide any equity conversion feature. Hence, the unique ability of convertible bonds to be exchanged for stock distinguishes them as the correct answer.

The characteristic that indicates a bond can be exchanged for stock is referred to as "convertible." Convertible bonds are a type of debt security that allow the bondholder the option to convert the bond into a specified number of shares of the issuing company's stock at predetermined times during its life. This feature provides an opportunity for bondholders to benefit from potential increases in the company’s stock price, effectively allowing them to participate in the equity upside while still receiving interest payments as debt holders.

In contrast, callable bonds enable issuers to redeem the bonds before their maturity at a predetermined price, which is beneficial for the issuer if interest rates decrease. Redeemable bonds are similar to callable bonds but typically allow the investor to sell their bond back to the issuer under certain conditions. Fixed-rate bonds simply have a constant interest rate throughout their lifespan and do not provide any equity conversion feature. Hence, the unique ability of convertible bonds to be exchanged for stock distinguishes them as the correct answer.