Accounting Discussion Convertible bonds generally will have lower coupon interest rates than non-convertible bonds. Please explain...

Accounting Discussion

Convertible bonds generally will have lower coupon interest rates than non-convertible bonds. Please explain the rationale for this.

Expert Solution

convertible bond and nonconvertible bond are the most common bond that you can see in the bond market.

comparing to nonconvertible bond ,convertible bond gave lower interest rate.a corporation issues a convertible bond to take advantage of reduced interest rates,since the presence of the conversion option provides upside potential for the bond holder, and these bond tend to demand lower interest rate.

the main reason for the lower interest rate is because of exchange of greater flexibility to transform the bond into shares of stock and for the potential to earn more if stock price rises.it also have the privilege to convert it to during maturity but,for a non convertible bond we don't have the same privilege.

nonconvertible bond are fixed income instrument ,usually issued by high-rated companies in the form of a public issue to accumulate long-term capital appreciation , they offer relatively higher interest rates when compare to convertible.

the main reason for they issue higher interest rate is because they don't have a conversion option comparing to other.and we can only rely on interest rate we don't have the conversion option.so in-order to attract the bond user the companies offer more interest rate than normal convertible bond.

ekkarill92 answered 2 years ago

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