Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:
A) subordinated straight debt is issued because there are other senior bondholders to protect them.
B) convertible debt is issued because the equity component will reduce these agency costs when value is shared.
C) convertible debt is issued because the holders can more readily sue when a high-risk project is under taken.
D) subordinated debt because monitoring is much easier with subordinated straight debt is issued.

Question

Quizplus · Accepted Answer

Convertible debt can mitigate the wealth transfer from bondholders to stockholders because it includes an option to convert the debt into equity. This option becomes valuable if the firm performs well, aligning the interests of bondholders and stockholders and reducing agency costs associated with wealth transfer.

Transfer or Expropriation of Wealth from Bondholders to Stockholders Is