An article in The Economist (Sept. 25, 1993, p. 93)

said, in part:

Neither fish nor fowl, convertible bonds, which give investors an option to convert into equities, have been gaining popularity in America. There were $103 billion of them outstanding at the end of August, up from $52 billion in 1990. Why the enthusiasm? For an issuing company, convertibles have several good features. A firm can borrow at about three percentage points below the cost of straight debt. It does not give up as much equity as with an ordinary share issue. That is why convertibles are particularly popular with small companies that hope to grow rapidly.

Do you think that convertible debt represents a cheap way to finance the firm? Can you think of any reasons why small, growing firms might favor convertibles?

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