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:

Average Total Cost

The total cost of production (fixed plus variable costs) divided by the number of units produced, indicating the cost per unit of output.

Marginal Cost

The cost of producing one additional unit of a good or service, which can influence production decisions.

Product Differentiation

A strategy businesses use to make their products unique from competitors'.

Elastic

Describes a situation in economics where the demand or supply of a good is sensitive to changes in price.