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 the above.

Question

Quizplus · Accepted Answer

Convertible debt is issued with an equity component, which can reduce agency costs when value is shared. This means that stockholders have an incentive to protect bondholders as they will also benefit from any increase in value. Therefore, transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when convertible debt is issued. The other choices may not have as much impact in reducing agency costs and protecting bondholders.

Transfer or Expropriation of Wealth from Bondholders to Stockholders Is