The Value of a Convertible Bond Is Relatively Insensitive to Changes

question 3

Multiple Choice

The value of a convertible bond is relatively insensitive to changes in the riskiness of the firm, because the value of the underlying bond is inversely related to changes in the firm's risk, while the value of the implicit call option is directly related to changes in the firm's risk.Consequently, with a convertible bond the firm's management no longer has an incentive to engage in ______to expropriate value from the bondholders, and therefore one of the major agency problems associated with debt is resolved.

• A)excessive consumption of perquisites.
• B)risk shifting.
• C)excessive dividend payments.
• D)excessively conservative investment policies.

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Definitions:

Mental Activities

The range of cognitive operations and processes that take place within the human mind, such as thinking, understanding, learning, and remembering.

Encoding Information

The process of converting information into a form that allows it to be stored in our brain.

Conditioned Stimulus

In classical conditioning, a previously neutral stimulus that, after becoming associated with the unconditioned stimulus, eventually comes to trigger a conditioned response.

Unconditioned Response

A natural, unlearned reaction to an unconditioned stimulus that occurs automatically without previous conditioning.