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:

Uncertainty

The lack of complete certainty in situations, often due to incomplete information, that affects decision-making processes in economics and finance.

Market Interest Rates

The rates at which borrowers and lenders conduct transactions in the open market, influenced by the supply and demand for credit, inflation, and central bank policies.

Nominal Interest

The interest rate on a loan or investment without adjusting for inflation.

Real Interest Rates

The interest rate adjusted for inflation, reflecting the true cost of borrowing or the true yield on savings.