Why might a company issue convertible bonds?

• A. To avoid higher interest rates for high credit ratings
• B. To secure funds at a lower cost for growth
• C. To replace existing debts with lower rates
• D. To fund acquisitions directly

Answer: (B)

Issuing convertible bonds is often an effective strategy for a company to secure funds at a lower cost, which is particularly advantageous for growth initiatives. Convertible bonds typically offer lower interest rates compared to traditional bonds due to the added benefit they provide to investors— the ability to convert the bond into equity at a later date. This conversion feature makes the bonds less risky for investors, allowing the company to raise capital more cost-effectively. By doing so, the company can allocate funds toward strategic growth opportunities such as expanding operations, developing new products, or entering new markets, all of which can potentially yield higher returns.

In addition, the lower cost of financing through convertible bonds can help preserve cash flow and reduce the financial burden during growth phases. As the company grows and possibly increases its equity, it may benefit from a stronger market position without the immediate pressure of higher interest expenses that might come with traditional debt. Thus, the rationale for choosing to issue convertible bonds is closely tied to the pursuit of growth while maintaining a more favorable financing structure.