A firm may prefer to issue a convertible bond, as opposed to issuing equity, because
A)a convertible issue sends a better signal to investors than an issue of common stock.
B)a convertible issue shows the management's willingness to take a chance that the stock price will rise enough to lead to conversion and also signals management's confidence in the future.
C)a convertible issue sends a better signal to investors than an issue of common stock, and an announcement of a stock issue generates worries of overvaluation and usually depresses the stock price.
D)a convertible issue sends a better signal to investors than an issue of common stock, an announcement of a stock issue generates worries of overvaluation and usually depresses the stock price, and a convertible issue shows the management's willingness to take a chance that the stock price will rise enough to lead to conversion and also signals management's confidence in the future.

Question

Quizplus · Accepted Answer

A convertible bond offers the option to the bondholder to convert their bond into a fixed number of shares of the issuer's common stock. Compared to an equity issue, a convertible bond issue sends a better signal to investors because it shows the management's willingness to take a chance that the stock price will rise enough to lead to conversion and also signals management's confidence in the future. Additionally, an announcement of a stock issue generates worries of overvaluation and usually depresses the stock price, whereas a convertible issue is often viewed as a more attractive security and may not have the same negative effect on the stock price.

A Firm May Prefer to Issue a Convertible Bond, as Opposed