Final answer:
Convertible bonds and nonconvertible bonds can have different coupon rates. Convertible bonds generally have lower coupon rates compared to nonconvertible bonds because they offer the potential for capital gains through conversion into stock. Nonconvertible bonds typically offer higher coupon rates to compensate for the lack of conversion option.
Step-by-step explanation:
Convertible bonds and nonconvertible bonds can have different coupon rates. The coupon rate of a bond is the annual interest payment divided by the bond's face value.
Convertible bonds are bonds that can be converted into a specified number of common shares of stock, while nonconvertible bonds cannot be converted.
Generally, convertible bonds have lower coupon rates compared to nonconvertible bonds because they offer the potential for capital gains through conversion into stock.
Investors are willing to accept a lower coupon rate on convertible bonds in exchange for the potential upside of converting to equity.
On the other hand, nonconvertible bonds typically offer higher coupon rates to compensate investors for the limited upside potential. These bonds do not offer the option to convert into stock, so they primarily provide interest income.