Question

Nicholas Industries can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Nicholas could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Nicholas would have to pay on the convertible, callable bond?
a. It could be less than, equal to, or greater than 6%.
b. Greater than 6%.
c. Exactly equal to 8%.
d. Less than 6%.
e. Exactly equal to 6%.

Answer 1

Answer:

a. It could be less than, equal to, or greater than 6%.

Explanation:

The attribute with related to the second bond i.e. converted and the feature of the sinking fund would be disposed off to decrease the required rate of return on the other hand feature of the call increase the required rate of return on the bond. Also it contains the low coupon rate as compared with the bond i.e. not convertible

Hence, the correct option is A.