Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 9 percent and $50 million of pure bonds with a coupon rate of 12 percent. Both bonds have the same maturity. Does the fact that the convertible issue has the lower coupon rate suggest that it is less risky than the pure bond? Would you regard the cost of the funds as being lower on the convertible security than on the pure bond? Explain.
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