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

question 40

Multiple Choice

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because

• A)the effects of risk are opposite on the two value components and tend to cancel each other out.
• B)if the firm is high risk, the option premium will be higher while the straight bond value is fixed.
• C)only risky companies issued these instruments.
• D)the equity value is dependent on current risks only, not the future risk at conversion.

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Definitions:

Marginal Revenue

The supplementary earnings received from the sale of one extra unit of a good or service.

Monopoly Power

Monopoly power refers to the ability of a company or entity to control the supply of a good or service, and to significantly influence the terms and price under which it is sold.

Marginal Cost

The extra financial burden of producing another unit of a good or service.

Monopoly Power

The ability of a single seller to control market prices and output in a particular industry.