Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the CONVERTIBLE, CALLABLE bond?

Question

Quizplus · Accepted Answer

The convertible, callable bond would have a higher risk than the non-convertible, non-callable bond. Therefore, Amram would have to pay a higher coupon rate on the convertible, callable bond to compensate investors for the additional risk.

Amram Inc Can Issue a 20-Year Bond with a 6% Annual