Answer: higher.

## Explanation **Correct Answer: C. higher.** **Key Concept:** Convertible bonds typically offer lower yields than otherwise identical non-convertible bonds because the conversion option provides additional value to the bondholder. **Detailed Analysis:** 1. **Convertible Bond Features:** - A convertible bond gives the bondholder the right to convert the bond into a fixed number of shares of the issuer's common stock. - This conversion option is valuable to investors because it allows them to participate in potential stock price appreciation. 2. **Yield Relationship:** - Since the convertible bond includes this valuable option, investors are willing to accept a lower yield (coupon rate) compared to a non-convertible bond. - The convertible bond's price will be higher (or its yield lower) than an otherwise identical non-convertible bond. 3. **Lock-up Period Consideration:** - The fact that the conversion option cannot be exercised for five years (lock-up period) makes the option slightly less valuable than an immediately exercisable option. - However, it still has significant value, so the convertible bond will still have a lower yield than the option-free bond. 4. **Economic Rationale:** - Investors pay a premium (in the form of accepting lower yield) for the conversion feature. - The non-convertible bond must offer a higher yield to compensate investors for not having the conversion option. **Example:** If both bonds have the same credit quality, maturity, and other terms, the convertible bond might yield 4% while the non-convertible bond yields 5%. The 1% difference represents the value of the conversion option. **Conclusion:** The option-free bond will have a higher yield than the convertible bond because investors require additional compensation for giving up the valuable conversion option.

Author: LeetQuiz .