A company issues bonds saying that it will use the proceeds for a safe investment. Instead, it uses the proceeds for a risky investment. Which of the following statements is true about this situation. a. This will result in a lawsuit from the stockholders because it is bait and switch. b. This will result in a decrease in the value of the debt because the company is riskier. c. This will cause bondholders to convert their bonds to stock. d. Dividends will go up to compensate shareholders for their increased risk. e. This will result in a decrease in the value of the equity because the company is riskier.

Question

Business

Royce Hendricks

20 February, 01:19

A company issues bonds saying that it will use the proceeds for a safe investment. Instead, it uses the proceeds for a risky investment. Which of the following statements is true about this situation. a. This will result in a lawsuit from the stockholders because it is bait and switch. b. This will result in a decrease in the value of the debt because the company is riskier. c. This will cause bondholders to convert their bonds to stock. d. Dividends will go up to compensate shareholders for their increased risk. e. This will result in a decrease in the value of the equity because the company is riskier.

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Answers (1)

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Isiah Wilcox · Answer 1

Option 'A' is correct.

This will result in a decrease in the value of the debt because the company is riskier.

Explanation:

This is an example of asset switching or bait and switch. Bait and switch is a morally suspect sales tactic that lures customers in with specific claims about the quality or low prices on items that turn out to be unavailable in order to up-sell them on a similar, pricier item. It is considered a form of retail sales fraud, though it takes place in other contexts.