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 issue these instruments.
D) the equity value is dependent on current risks only, not the future risk at conversion.
E) None of these.

Question

Quizplus · Accepted Answer

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because the effects of risk on the bond and the option components tend to offset each other, stabilizing the overall value.

Issuing Convertible Bonds or Bonds with Warrants Is Useful for a Company