SIE Understanding Products and Their Risks Question 37: Answer and Explanation

Question: 37

Which of the following conversions typically occurs?

• A. Convertible preferred stock converts to senior bonds.
• B. Convertible senior bonds convert to subordinated debentures.
• C. Convertible preferred stock converts to common stock.
• D. Convertible common stock converts to preferred stock.

Correct Answer: C

Explanation:

C: Choice C is correct because convertible preferred stock is often issued, which may be converted to common stock. In this case, the market value of the preferred stock may be similar to that of the common stock, proportionate to the par value of each. Choice A is incorrect because convertible preferred stock typically does not convert to senior bonds as that would diminish its claim on dividends. Choice B is incorrect because convertible senior bonds are not typically issued, and subordinated debentures have a later claim on net assets in the case of liquidation and would not be a desirable conversion. Choice D is incorrect because convertible common stock is not typically issued.