Asked by DAVID WHITLOCK on Jun 01, 2024
Verified
An investor can acquire shares of stock in Acme Corporation either by purchasing shares on the stock market or by purchasing a bond that is convertible into shares of Acme stock. After careful study, the investor discovers that she can profit by purchasing the bond, converting it to shares of stock, and selling the stock. This practice is called:
A) selling short.
B) arbitrage.
C) profiteering.
D) dumping.
E) none of the above
Arbitrage
Practice of buying at a low price at one location and selling at a higher price in another.
Convertible Bond
A type of bond that can be converted by the holder into a specified number of shares of the issuing company's stock at certain times during its life, usually at the discretion of the bondholder.
Acme Corporation
A fictional company often used as a generic placeholder in examples and discussions to represent any typical, large-scale business entity.
- Understand the evolution and objectives of economic theories.
Verified Answer
SN
Sorina NannaJun 05, 2024
Final Answer :
B
Explanation :
This practice is called arbitrage, which involves buying an asset in one market and selling it for a higher price in another market to make a profit. In this case, the investor is buying a bond that is undervalued relative to the stock, then converting it into stock and selling it for a profit.
Learning Objectives
- Understand the evolution and objectives of economic theories.