4 Many arguments, both plausible and implausible, are given for issuing convertible bonds and bonds with warrants. One plausible rationale for such bonds has to do with risk. Convertibles and bonds with warrants are associated with risky companies. Lenders can do several things to protect themselves from high-risk companies:

(a) They can require high yields.

(b) They can lend less or not at all to firms whose risk is difficult to assess.

(c) They can impose severe restrictions on such debt.

Another useful way to protect against risk is to issue bonds with equity kickers. This gives the lenders the chance to benefit from risks, and reduces the conflicts between bondholders and shareholders concerning risk.