Question

Which of the following statements is FALSE?

Select one: a. Senior debt adds protection to investors because senior debt holders have priority in claiming assets in the event of default.

b. Stronger covenants imply lower interest rates due to a smaller likelihood of default.

c. While call options hurt the investors, sinking fund provisions add protections to the investors.

d. Since convertible debt benefits the issuing firm, it comes with higher interest rate (compared to identical bonds without the convertible provision) to compensate investors.

Answer 1

The false statement is:

d. Since convertible debt benefits the issuing firm, it comes with higher interest rate (compared to identical bonds without the convertible provision) to compensate investors.

The correct statement would be:

d. Since convertible debt benefits the issuing firm, it comes with lower interest rate (compared to identical bonds without the convertible provision) to compensate investors.

Investors will be benefited by lower interest rates, and not higher interest rates.