UPSC Previous Year Question | Prelims GS | 2022

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?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Answer

Correct Answer

Both 1 and 2

Explanation

Both statements are correct: the conversion option lets issuers offer a lower coupon rate, and since equity value can rise with inflation, conversion gives bondholders a degree of hedge/indexation against rising consumer prices.

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