Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 10% and

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Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 10% and $50 million of straight bonds with a coupon rate of 14%. Both bonds have the same maturity. Does the convertible issue’s lower coupon rate suggest that it is less risky than the straight bond? Is the cost of capital lower on the convertible than on the straight bond? Explain.

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Financial management theory and practice

ISBN: 978-1439078099

13th edition

Authors: Eugene F. Brigham and Michael C. Ehrhardt

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