Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:
A)risk affects the two value components of these securities in opposing ways.
B)if the firm turns out to be high risk,both the option premium and the straight bond value will be high.
C)generally only well-established,high-grade companies issue these instruments.
D)the equity value is dependent on current risks rather than future risks.
E)these securities generally carry significant restrictive covenants.

Question

Quizplus · Accepted Answer

Issuing convertible bonds or bonds with warrants allows investors to convert the bonds into equity if the company's value increases, while also providing the security of fixed income if the company's value does not increase. The risk of the company affects the value of the bond and the value of the option or warrant in opposite ways. If the company is high risk, the bond value will be low, but the option or warrant value will be high. Therefore, the combination of the two can provide flexibility for investors and is useful for companies of unknown risk.

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