UPSC Prelims 2022 Question:

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?

Explanation:

• • A convertible bond gives the holder the option to convert or exchange it for a predetermined number of shares in the issuing company. When issued, they act just like regular corporate bonds, albeit with a slightly lower interest rate. Because convertibles can be changed into stock and, thus, benefit from a rise in the price of the underlying stock, companies offer lower yields on convertibles. So, statement 1 is correct.
    
    

• One of the advantages of convertible bonds is that the option to convert to equity affords the bondholder a degree of indexation to rising consumer prices. So, statement 2 is correct. 
  
  

Therefore, option (3) is the correct answer.

Subject: Economics|Financial Sectors and Capital Market