CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
An investor holds a bond that can be exchanged for a fixed number of the issuer's ordinary shares at the investor's discretion. The value of this conversion feature to the investor will most likely increase when:
The conversion feature most likely gains value when the issuer's share price rises. Conversion is effectively a call option on the shares, so a higher share price increases its intrinsic value, whereas rising rates or wider credit spreads mainly reduce the bond component.
- Athe issuer's share price risesCorrect
- Bmarket interest rates rise
- Cthe issuer's credit spread widens
Explanation
A conversion option is a call option on the issuer's shares, so its value rises as the share price rises. Higher interest rates or wider credit spreads lower the straight bond value but do not directly increase the option value in the way a share price rise does.
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