 The firms that issue convertible debt are different from other firms working in the industry because of three reasons The first reason is that bond rating of the firm issuing convertible bonds is different from other firms The second reason is that convertible bonds are generally regarded as Unsecured and subordinated and the third reason is that convertible bonds are generally issued by small firms who have higher growth and Higher financial leverage. So it is the firm that gives a clue for issuing convertible bonds The first reason is that the matching of cash flows to add costly financing firms may issue convertible bonds with cash flows that match with the cash flows of the firm and also it is the preference of young risky and growing firm to issue convertible bonds because such firms issue convertible are bonds with warrants as Initially because these instruments have lower interest rates Once the firm is successful conversion is there for convertibles because it causes It also causes costly dilution for the firm Provided the firm can also afford it The second reason is the backdoor equity convertibles are seen as backdoor equity because young Somal high growth firms cannot issue debt due to higher financial distress cost The owners may be unwilling to issue equity if current stock prices are too low in the stock market risk synergy if risk assessment of an issuing company Becomes costly or hard then convertible bonds and bonds with warrants are a useful financial instrument A higher risk firms bond may be priced using the higher yield and convertible bonds and bond with warrants have some protections like these protections are against the mistakes of risk valuation and convertible bonds and bond with warrants have two parts built therein The first is the straight bond and second is the call options on the company's underlying stock So if you see a grid In comparison of straight bond and a call option Then for companies with low risk the straight bond will have higher value and the call option thereof will be having low value And the companies having higher risk their straight bond will have low value and The call option will have accordingly the higher value The third reason is the agency cost It is the solution to agency problem associated with the raising of capital money Straight bonds are like risk-free bonds minus a put option on the firms' assets This means that it is an incentive for the creditors to force the firm into low risk activities But on the other hand common stockholders have incentives to have higher risk higher value projects or higher risk projects Because higher risk projects with negative net present value Will transfer wealth from bond holders to the stock holders So convertible bonds mitigate agency cost and also these convertible bonds have less restrictive Dit covenants than do the straight bonds have in the real world