1. Which of the following are the main motivation for issuing convertible bonds
a. Convertible bonds are cheaper financing instruments relative to bonds because they have a lower interest rates.
b. It is hard to price the embedded option. Firm, having an information advantage, can sell them at a higher price.
c. Mitigates agency problems between manager and bondholders.
d. Convertible bonds allow companies to increase their shares if their growth options turn out to be successful.
2. Company A and company B issue convertible bonds with identical characteristics except that company A’s bond is also callable. Both companies also have identical stock characteristics.
a. The coupon on company A’s convertible bond will be lower than on company B’s bond
b. The coupon on company B’s convertible bond will be lower than on company A’s bond
c. The coupon on company A’s convertible bond will be equal that on company B’s bond
d. It is not possible to determine