Which of the following describes the characteristics of a convertible bond?

• A. A bond that can be exchanged for a predetermined number of shares of the issuing company's stock.
• B. A bond that is backed by physical assets such as real estate.
• C. A bond that pays interest only at maturity.
• D. A bond that can be redeemed by the issuer before its maturity date at a specified price.

Answer: (A)

Verified step by step guidance

1. Understand the concept of a convertible bond: A convertible bond is a type of bond that gives the bondholder the option to convert the bond into a predetermined number of shares of the issuing company's stock, typically at specific times during the bond's life.
2. Compare the characteristics of a convertible bond with the other options provided in the question. For example, a bond backed by physical assets is known as a secured bond, not a convertible bond.
3. Analyze the option describing a bond that pays interest only at maturity. This is typically referred to as a zero-coupon bond, which is different from a convertible bond.
4. Evaluate the option describing a bond that can be redeemed by the issuer before maturity at a specified price. This is known as a callable bond, which is distinct from a convertible bond.
5. Conclude that the correct characteristic of a convertible bond is its ability to be exchanged for a predetermined number of shares of the issuing company's stock, as this aligns with the definition of a convertible bond.