With reference to Convertible Bonds, consider the following statements :
- 1.As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
- 2.The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.
Which of the statements given above is/are correct ?
Show answer
Answer: C. Statement 1 is correct: because the holder can convert the bond into shares, the company pays a lower interest rate than on an ordinary bond. Statement 2 is correct: share prices tend to rise with inflation over time, so the option to convert gives some protection against rising prices. So both.
Watch for: Statement 2 uses the term 'indexation', which students link only to inflation-indexed bonds.
Why the other options are wrong
- A. Wrong because statement 2 is also correct.
- B. Wrong because statement 1 is also correct.
- D. Wrong because both statements are correct.
Source to check: SEBI investor education material on convertible debentures; RBI and NSE glossaries on convertible bonds
Answer from the official UPSC key. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.