As a result of a competitor going bankrupt, credit spreads for the industry widen, including
those for Heavy Elements, as bond investors demand higher yields. However, its common equity
is unaffected as equity investors believe the bankruptcy of a competitor will mean more
business for Heavy Elements. All else being equal, what is the likely impact on the price of Heavy
Elementsā convertible bond (decrease in value, no change in value, or increase in value)?
f. A few months after the competitorās bankruptcy, equity investors realize revenues for the entire
industry are slowing. Common stock of all companies in the industry decline sharply, including
Heavy Element, whose equity price falls to $28 per share. What is the risk-return characteristic
of the convertible bond now: common stock, or a bond identical to the convertible but without
the conversion option?