CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following could be a sensible reason for issuing convertibles?

A. Convertibles are convenient and flexible; they're usually unsecured and subordinated, and cash requirements for debt service are relatively low.
B. Interest rates on convertible issues are significantly less than on straight debt.
C. Firms that need equity capital use convertibles as a roundabout way of issuing stock.
D. Firms prefer to issue convertibles when their shares are under-valued.
Correct Answer: A

User Contributed Comments 6

User Comment
yanpz I thought it's B... anybody?
mtcfa B may be wrong due to the word significantly.
o123 i'd go with B...significantly would serve to descibe the uncertainty of the actual rate due to the lack of knowledge on how much the company's shares are worth.
also...its the reason for the second part of A. I guess that makes them both right.
o123 Ok scratch that!
Have to look at it from the company's perspective, not as an analyst. Convertible debt is recorded exactly the same as nonconvertible debt.
Jurrens o123, this is true, but the firm can issue it at a lower rate because of the built in option.
johntan1979 Agree with mtcfa... always apply the conservative principle.
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