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?
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A hard Economy multiple-choice question from UPSC Prelims 2022. Attempt it above, then check the correct answer and detailed explanation below.
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Correct answer: C. Both 1 and 2
Both are correct — convertible bonds carry a lower coupon because of the valuable equity-conversion option, and converting to equity offers the holder some hedge (indexation) against rising prices, since equity tends to keep pace with inflation. Option (c).
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