Amram Inc.can issue a 20-year bond with a 6% annual coupon at par.This bond is not convertible,not callable,and has no sinking fund.Alternatively,Amram could issue a 20-year bond that is convertible into common equity,may be called,and has a sinking fund.Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond,the convertible,callable bond with the sinking fund,to have it sell initially at par?

Question

Quizplus · Accepted Answer

The second bond's convertible feature and sinking fund would tend to lower its required rate of return,but the call feature would raise its rate.Given these opposing forces,the second bond's required coupon rate could be above or below that of the first bond.However,the convertible feature generally dominates in the real world,so convertibles' coupon rates are generally less than comparable non-convertible issues' rates.

Amram IncCan Issue a 20-Year Bond with a 6% Annual Coupon