Suppose a company simultaneously issues $50 million of convertiblebonds with a coupon rate of 10% and $50 million of straight bonds with acoupon rate of 14%. Both bonds have the same maturity. Does the convertible issue’s lower coupon rate suggest that it is less risky than the straightbond? Is the cost of capital lower on the convertible than on the straightbond? Explain.
Suppose a company simultaneously issues $50 million of convertiblebonds with a coupon rate of 10% and $50 million of straight bonds with acoupon rate of 14%. Both bonds have the same maturity. Does the convertible issue’s lower coupon rate suggest that it is less risky than the straightbond? Is the cost of capital lower on the convertible than on the straightbond? Explain.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter20: Hybrid Financing: Preferred Stock, Warrants, And Convertibles
Section: Chapter Questions
Problem 7Q
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Question
Suppose a company simultaneously issues $50 million of convertible
bonds with a coupon rate of 10% and $50 million of straight bonds with a
coupon rate of 14%. Both bonds have the same maturity. Does the convertible issue’s lower coupon rate suggest that it is less risky than the straight
bond? Is the cost of capital lower on the convertible than on the straight
bond? Explain.
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