CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Which of the following statements regarding factors that influence the attractiveness of financing with warrants and convertibles is false?
A. These hybrid securities are generally unsecured by the issuer.
B. If management expects future growth prospects to outweigh risks, then issuing convertible bonds or bonds with warrants would be deemed more prudent than issuing straight bonds.
C. These hybrid securities are more commonly issued by either smaller companies or companies that are facing financial distress.
Explanation: Since a convertible bond will always be higher in price than a corresponding straight bond, its YTM will always be lower than that of a straight bond.

If management expects future growth prospects to outweigh risks, then issuing convertible bonds or bonds with warrants would imply that these future earnings will have to be shared among new shareholders as well. Thus, the more prudent move would be to issue straight bonds so that the exiting shareholders may keep those increased earnings amongst themselves.

User Contributed Comments 3

User Comment
jpducros Can we conclude that thus C is right, and that these hybrids are more issued by companies in financial distress ?
YOUCANDOIT C does make sense, since these convertible features of bonds are valued by investors and thus, lower the required rate of return on these securities...

smaller firms and firms in financial distress would prefer issuing these types of bonds over straight bonds since they are less costly.
majsajab didnot understand regarding YTM. Can somebody explain?
You need to log in first to add your comment.