Final answer:
The price of a convertible bond would likely decline less than the stock because of its bond characteristics providing a cushion. However, its value may still be influenced by perceptions of future cash flows and stock prospects, which are accounted for through Present Discounted Value.
Step-by-step explanation:
If you own a convertible bond, and the underlying stock declines, you would expect the price of your bond to decline less than the stock. This is because convertible bonds have characteristics of both bonds and stocks. They pay fixed interest like traditional bonds, which tends to stabilize their value, but they also have the potential to be converted into a predetermined number of shares of the issuing company's stock. Hence, the bond part of the security provides a cushion against a drop in the stock price. However, if the stock price falls significantly, it may affect the convertible feature's attractiveness, potentially reducing the bond's value, but not as much as the stock itself.
Applying Present Discounted Value to a bond, or to any investment, is an approach whereby future cash flows such as capital gains or dividends are discounted back to present value. The market's view on the future prospects of a company can have an impact on how much investors are willing to pay for these future benefits. Since a convertible bond offers features of both equity and debt, its value will be influenced by both the stability and interest payments of the bond component and the potential equity upside, leading to typically less price volatility than the underlying stock.