8006 Exam Dumps | [According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
Question 36

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Question 36/101

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.] The price of an 'out-of-the-money' convertible security is affected by:
I. Changes in interest rates
II. Changes in the issuer's credit risk
III. Changes in the issuer's share price
IV. Changes in the implied volatility of the issuer's share price

A. I and II

B. III and IV

C. I, III and IV

D. All of the above

Correct Answer: A

Explanation
An out of the money convertible security behaves just like a regular debt security as the option is near worthless. Therefore it is affected by changes in interest rates and the credit risk of the issuer, and unaffected by changes in the prices or volatility of the issuer's shares (the underlying).

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