Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because
A) The effects of risk are opposite on the two value components and tend to cancel each other out.
B) If the firm is high risk, the option premium will be higher while the straight bond value is fixed.
C) Only risky companies issued these instruments.
D) The equity value is dependent on current risks only, not the future risk at conversion.

Question

Quizplus · Accepted Answer

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because the effects of risk are opposite on the two value components (the bond and the option/warrant), which tend to cancel each other out, making it a balanced financing option.

Issuing Convertible Bonds or Bonds with Warrants Is Useful for a Company