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Assume an efficient market with no arbitrage opportunities
Assume an efficient market with no arbitrage opportunities. A convertible bond currently has a conversion value far greater than its straight value. How does this convertible bond's market conversion price compare to its common share price and why?
A. Market conversion price>common share price, because the convertible bond offers investors unlimited upside potential which common shares do not
B. Market conversion price=common share price, because the convertible is no different from equity in this scenario
C. Market conversion price<common share price, because common shares offer investors downside protection that the convertible does not.
D. Market conversion price<common share price, because common shares offer more upside potential which the convertible does not.
E. Market conversion price>common share price, because the convertible bond offers investors downside protection which common shares do not.
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