Upon exercise of the conversion option for a convertible bond, all issuers must exchange shares of stock for the bond. Explain whether you agree or disagree

What will be an ideal response?

When the holder of a convertible bond exercises the option to convert, the traditional outcome was that the issuer exchanged the bond for the number of shares as indicated by the conversion ratio. So in terms of a "traditional" bond, one could agree with the statement. However, one can disagree with the above statement in that there can exist bonds that do not allow the straightforward conversion privilege of only using shares in exchange for bonds. For example, for a convertible bond that includes a net share settlement provision, the issuer pays the par value in cash to retire the bonds upon exercise of the conversion option to convert. Also, this type of bond will be trading above its par value. The difference between the conversion value and the par value is additional compensation owed to the holder. That difference is made up by the issuer providing shares of stock to the holder. In some issues, the issuer will have the option to settle by providing a combination of cash and stock. Issuer motivation for the issuance of convertible bonds with this provision (also called cash-par settlement provision) was that from a financial accounting perspective, convertible bonds with net share settlement provisions were treated favorably in the calculation of the issuer's earnings per share. However, the change in the financial accounting rules that were put into place in 2008 no longer made this type of financing attractive to corporations. To see the popularity of these bonds before then, since 2005 when they first became popular, $120 billion of the $171 billion of U.S. convertible bonds contained this provision.