Final answer:
Attaching a convertible feature to a bond allows firms to offer a lower interest rate, as it gives bondholders the potential to convert to equity, reducing risk. The rate on a bond reflects the issuing company's risk level, with safer companies paying less than riskier ones. Convertible bonds often appeal to growth phase companies seeking lower costs with a willingness to trade equity potential.
Step-by-step explanation:
True: Attaching a convertible feature to a bond issue does often enable a firm to incur a lower interest rate on the debt it issues. Convertible bonds provide bondholders with the option of converting their bonds into a pre-determined number of shares of the issuing company's stock, making this debt instrument more appealing. As a result, firms can generally offer a lower interest rate on convertible bonds compared to traditional bonds since they provide the additional value of potential equity participation.
The interest rate on debt is predominantly influenced by the perceived risk. The U.S. government, being a very safe borrower, pays lower interest rates on Treasury bonds. Comparatively, corporate entities, like safe borrowers or larger, more established firms, typically pay higher interest rates than the government but lower than risky borrowers. Riskier companies, including those growing or with fluctuating business conditions, attract higher interest rates to offset the potential for default; these are often referred to as high yield bonds or junk bonds.
Oftentimes, convertible bonds are issued by companies that are in growth phases or by those seeking to minimize interest costs while willing to provide potential equity upside as a trade-off. This reflects an understanding of the inherent trade-offs and incentives involved in issuing corporate bonds versus other types of debt instruments.