Question

Company A issue a 10-year, 10% convertible bonds last year. This year, the company had to recall a new product due to some serious technical issues. The consensus among equity analysts is that the company’s future prospect appears to be poor. Given this information, the convertible bond price is likely to be primarily:

A. Credit sensitive.

B. Both Credit and Interest Rate sensitive

C. Interest rate sensitive.

D. Equity sensitive.

Answer 1

Risks associated with bond market are

Reinventment risk: risk arise due to change in interest rates

Credit risk: risk that the company may default

Liquidity risk : risks arising due to non salabilty of bond

Given the above case: the convertable bond likely to be Primarily credit sensitive

So correct answer is A)

Every bond with more time to maturity is sensitive to interest rates but it is not primary here

There is no equity risk because even the firm equity shares value falls it has protection at its straight value