Suppose we have a chemical industry company (Company A) that issues a convertible bond with the following information:

• Issue Date: 15 Sept 2010
• Maturity Date 15 Sept 2015
• Interest 3.75% payable annually.
• Issue Price: $1000 at par.
• Conversion Ratio: 15
• Convertible Bond Price on 16 Sept 2012: $1,230
• Share Price on 16 Sept 2012: $52

1. The risk-return characteristics of the convertible bond on 16 Sept 2012 most likely resemble that of:

A. All of the answers are correct.

B. a busted convertible.

C. the companys common stock.

D. an identical non-convertible bond with the same characteristics.

2. As a result of favorable economic conditions, credit spreads for the chemical industry narrow, resulting in lower interest rates for the debt of companies in this industry. All else equal, the price of company As convertible bond will most likely:

A. decrease significantly.

B. increase significantly.

C. not change significantly.

D. become indeterminate.