Question
UPSC Prelims 2022 Question:
With reference to Convertible Bonds
consider the following statements:
- As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
- 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?
Answer (Detailed Solution Below)
Option 3: Both 1 and 2
Detailed Solution
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.
- 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
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