A. tender the bonds at the call price
If the bonds are tendered at the call price, the owner receives $1,050 per bond.
If the bonds are sold at the current market price of 104, the owner receives $1,040 per bond.
Converting the bonds into common means that the bonds must be tendered to the transfer agent, who will cancel the bonds and issue 20 shares of stock for each bond tendered. Since each share is now worth $52, this would yield 20 x $52 = $1,040 if those shares are sold right now. The only problem with this is it takes about 30 days for the transfer agent to do this, so the shares cannot be sold "right now." In 30 days, who knows where the share price will be? (Note that if the question gave the answer that the customer should short the stock at $52, tender the bonds, and then when the shares arrive, deliver them to cover the short position, the customer would earn the same $1,040 per bond as in Choice B.)
Continuing to hold the bonds does not make sense since interest payments will cease.
Also note that the amount of accrued interest to be received is irrelevant to the question. Since the customer already holds the bond, the customer is entitled to the amount of accrued interest due up until the call date, regardless of whether he or she sells the bond or converts!
Arrange the following in priority of claim in a corporate liquidation:
I Unpaid Wages
II Secured Bondholders
III Subordinated Bondholders
IV Debenture Bondholders
A. I, II, III, IV
B. IV, III, II, I
C. I, II, IV, III
D. II, I, IV, III