Final answer:
Convertible bonds provide the bondholder the option to convert the bond into stock, not the issuer the right to retire them early. They differ from bank loans mainly in who the borrower must persuade. Bond values fluctuate with market interest rates, with corporate bonds offering higher returns than Treasury bonds due to higher risk.
Step-by-step explanation:
Convertible bonds do not give the issuer the right to retire bonds prior to maturity; rather, they provide the bondholder the option to convert the bonds into a predetermined number of shares of the issuing company's stock. Despite bonds and bank loans sharing similarities such as being forms of borrowing money and requiring the payment of interest, they differ in terms of who the firm has to persuade to lend money. Bank loans require persuading a bank while issuing bonds requires persuading multiple bondholders.
When interest rates change, the value of bonds to investors changes as well. If interest rates fall below the bond's coupon rate, the bond becomes more attractive as it pays out a higher rate compared to the market. Conversely, if interest rates rise above the bond's coupon rate, the bond becomes less attractive since new bonds in the market offer higher rates.
Bonds issued by firms are considered riskier than Treasury bonds, which is why they offer a higher interest rate to compensate for the added risk, and their rates tend to rise and fall together with the market interest rates in relation to their perceived risk.