6. Comparing bonds with warrants to convertibles Aa Aa Convertible debt and straight debt issued with warrants are similar securities, because both are debt securities that represent potential equity claims on the issuer's assets. In fact, convertible debt can be thought of as straight debt plus nondetachable warrants. However, several important distinctions do exist. Use the following table to indicate whether the characteristic listed refers to convertible bonds or to stock warrants: C Characteristic Convertible Bonds Debt with Warrants When exercised, the issuing firm receives new equity capital on stockholders equity are created, but no capital is transferred. When exercised, new claims C These securities tend to have higher flotation costs These securities tend to be issued by larger, less risky firms If a firm does not grow as expected subsequent to convertible or bond-with-warrant issues, does that make it more or less likely that the securities will be converted or exercised? Less likely to be converted or exercised More likely to be converted or exercised