ABC Corporation has outstanding a 7.75% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is true? A) To profit in this situation, the investor should buy the bonds and short the stock. B) The bond is at parity with the stock. C) An arbitrage opportunity does not exist in this situation. D) To profit in this situation, the investor should buy the stock and short the bonds.
ABC Corporation has outstanding a 7.75% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is true? A) To profit in this situation, the investor should buy the bonds and short the stock. B) The bond is at parity with the stock. C) An arbitrage opportunity does not exist in this situation. D) To profit in this situation, the investor should buy the stock and short the bonds.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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am. 172.
Transcribed Image Text:ABC Corporation has outstanding a 7.75% convertible debenture currently trading at
102. The bond is convertible into common stock at $40. ABC stock is trading $45 per
share. Which of the following statements is true?
A) To profit in this situation, the investor should buy the bonds and short the stock.
B) The bond is at parity with the stock.
C) An arbitrage opportunity does not exist in this situation.
D) To profit in this situation, the investor should buy the stock and short the bonds.
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