Civil Services Examination · Question 65
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 & explanation
Answer: (C) Both 1 and 2
Explanation
The conversion option lets issuers pay lower coupons. Since equity prices tend to rise with inflation, conversion gives some protection against rising prices.