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 ...

The convertible bond has an expected return that consists of an int ...

Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 9 percent

Question:

Suppose a company simultaneously issues $50 million of convertible bonds with a rate of 9 percent and $50 million of pure bonds with a rate of 12 percent. Both bonds have the same maturity. Does the fact that the convertible issue has the lower 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.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...