Impact of Convertible Feature on Bond Sensitivity

Hard Fixed Income Securities Bond Features

Investors evaluating fixed income securities must pay careful attention to the various features that can impact risk and return. One key feature is whether a bond is 'convertible' or not. A convertible bond provides the option for an investor to convert it into a predetermined number of shares of the issuer's equity. Understanding the implications of this feature can significantly affect an investor's decision-making process.

Consider a company that issues convertible bonds with a face value of $1,000, a coupon rate of 5%, and a conversion price of $50. If the market price of the underlying stock increases significantly, converting the bond may become attractive for investors. In this context, which aspect of convertible bonds could lead to greater sensitivity in price than non-convertible bonds when interest rates fluctuate?

Convertible bonds generally have lower coupon rates, exposing them to greater price volatility.

Convertible bonds have a fixed maturity date, which limits their price fluctuations.

Convertible bonds allow for potential equity upside, thereby increasing their price sensitivity to interest rates.

Hint

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