The convertible bond has an expected return which consists of an interest yield (10 percent) plus an expected capital gain. We know the expected capital gain must be at least 4 percent, because the total expected return on the convertible must be at least equal to that on the nonconvertible bond, 14 percent. In all likelihood, the expected return on the convertible would be higher than that on the straight bond, because a capital gains yield is riskier than an interest yield. The convertible would, therefore, probably be regarded as riskier than the straight bond, and \(r_{c}\) would exceed \(r_{d}\). However, the convertible, with its interest yield, would probably be regarded as less risky than common stock. Therefore, \(\mathrm{r}_{\mathrm{d}}<\mathrm{r}_{\mathrm{c}}<\mathrm{r}_{\mathrm{s}}\).