Explain how the issuance of a convertible bond can be a very attractive means of raising common equity funds.

Expert Solution

At the option of the bondholder (creditor), the bond is exchanged for a specified number of common shares (and the bondholder becomes a common stockholder). Often convertible bonds are issued when the common stock price is low, in the opinion of management, and the firm eventually wants to increase its common equity. By issuing a convertible bond, the firm may get more for the specified number of common shares. When the common stock price increases sufficiently, the bondholder will convert the bond to common stock.

Bondholders may opt to exchange bonds for common shares, becoming stockholders, especially when stock prices rise.

Junaid answered 8 months ago

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