Why does the Investors often are reluctant to convert bonds to stock, even when share prices have risen significantly since the convertible bonds were purchased?
Why does the Investors often are reluctant to convert bonds to stock, even when share prices have risen significantly since the convertible bonds were purchased?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Why does the Investors often are reluctant to convert bonds to stock, even when share prices have risen significantly since the convertible bonds were purchased?
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Investors often are reluctant to convert bonds to stock, even when share prices have risen significantly since the convertible bonds were purchased. This is called induced conversion. This is due to some reasons like:
- Because the market price of the convertible bonds will rise along with the market prices of the stock. So, companies sometimes try to induce conversion.
- The motivation might be to reduce debt and become a better risk to potential lenders or achieve a lower debt to equity ratio.
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