6. Comparing bonds with warrants to convertibles Convertible debt and straight debt issued with warrants are similar securities, because both are debt securities that represent potential equity claims on the issuers 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:

Characteristic Convertible Bonds Bond with Warrants

When exercised, the issuing firm receives new equity capital.

These securities may contain a call provision that allows the issuer to force conversion or exercise of the securities before their maturity.

These securities tend to have higher flotation costs.

These securities tend to be issued by larger, less risky firms.

Do convertible securities aggravate or ease potential conflicts between bondholders and shareholders?

Ease potential conflicts between bondholders and shareholders

Aggravate potential conflicts between bondholders and shareholders