The value of a convertible bond is relatively insensitive to changes i

The value of a convertible bond is relatively insensitive to changes in the riskiness of the firm, because the value of the underlying bond is inversely related to changes in the firm’s risk, while the value of the implicit call option is directly

related to changes in the firm’s risk. Consequently, with a convertible bond the firm’s management no longer has an incentive to engage in to expropriate value from the bondholders, and therefore one of the major agency problems associated with debt is resolved.
a. excessive consumption of perquisites.
b. risk shifting.
c. excessive dividend payments.
d. excessively conservative investment policies.

ANSWER

B