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 undertaken.
D) subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued.
E) None of these.

Question

Quizplus · Accepted Answer

Convertible debt is less likely to lead to transfer or expropriation of wealth from bondholders to stockholders because it includes an equity component. This provides an alignment of interests between bondholders and stockholders, as both parties benefit from an increase in value. As a result, there is less incentive for stockholders to expropriate wealth from bondholders.

Transfer or Expropriation of Wealth from Bondholders to Stockholders Is