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Assume that XYZ corporation decided to simultaneously issue $40 million of straight bonds with a coupon...

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Finance

  1. Assume that XYZ corporation decided to simultaneouslyissue $40 million of straight bonds with a coupon rate of 14percent and $40 million of convertible bonds with a coupon rate of12 percent. Both bonds have the same maturity.

    1. Does the fact that the convertible issue has the lowercoupon rate suggest that it is less risky than the straight bond?Explain.

    2. Is the cost of capital lower on the convertible than onthe straight bond? Explain.

Answer & Explanation Solved by verified expert
3.9 Ratings (784 Votes)
Convertible Bonds are better than Straight Bonds and shares the similar risk at same coupon rateas it typically offers a better return than a traditional bond without the added risk of the stock market In this case the Convertible Bonds are at lower coupon rate than Straight Bonds so less risky for the issuer as all    See Answer
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Assume that XYZ corporation decided to simultaneouslyissue $40 million of straight bonds with a coupon rate of 14percent and $40 million of convertible bonds with a coupon rate of12 percent. Both bonds have the same maturity.Does the fact that the convertible issue has the lowercoupon rate suggest that it is less risky than the straight bond?Explain.Is the cost of capital lower on the convertible than onthe straight bond? Explain.

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