Question

Convertible bond vs straight fixed-rate bond.

Which bond has a higher demand, higher risk, and price ceteris paribus.

Answer 1

Answer:

	Convertible Bond	Fixed- Rate Bond
1. Type	Convertible bond is a bond which gives fixed interest for certain agreed period and thereafter it will converted in to equity or stock.	Fixed - rate Bond is a bond which gives fixed rate of interest for the life of a bond.
2. Demand It depends on the type of the investor and the risk and return	Investor who wants higher return than normal on investment and ready to bear a risk then it chooses to invest in Convertible Bond For example: If company A issues Convertible bonds and Company B issues Fixed Rate bonds and Both gives same returns on bonds but Company A 's Stock is in high demand and gives higher return then investor will invest in Company A's Convertible Bonds.	Investor Who Wants stable returns on Investment then it chooses to Invest in Fixed - Rate Bond. For example : If company A issues Convertible bonds and Company B issues Fixed Rate bond and both gives same returns on bond but Company A's Stock has volatility gives lower return than bond then Investor will invest in Company B's Fixed - Rate Bond
3. Higher Risk	Convertible Bond has Higher Risk as it will converted in stock after some period which will give returns as per market and companies condition.	Fixed - Rate Bond has Lower risk as it gives fix rate of return on investment
4. Price Ceteris Paribus	If Price Ceteris Paribus is applied which means all other things or factors are constant ( factors like Market Condition, Investor Temperament, Risks involved etc ) then in such case Both bonds gives fixed rate of return at present if coupon rate of bond is equal to Current market yield or risk free return then it will have same demand, if coupon rate is lower then the demand will be fallan, if coupon rate is higher then demand will be higher