UPSC CSE Prelims
Question 38
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 ?
View correct answer and explanation
Correct answer: C
Correct Option: C (Both 1 and 2)
Explanation: Convertible bonds carry an equity-conversion option that can justify lower coupons and give participation in a company’s share-price appreciation, partially offsetting inflation risk.
Statement / Pair / Item-wise Analysis:
1. True / qualifies - Investors accept lower interest in return for the possible upside of converting to shares.
2. True / qualifies - Conversion links eventual value to equity prices, offering some-not guaranteed-protection against rising consumer prices.
Option-wise Analysis:
A. Incorrect-omits 2 even though Conversion links eventual value to equity prices, offering some-not guaranteed-protection against rising consumer prices.
B. Incorrect-omits 1 even though Investors accept lower interest in return for the possible upside of converting to shares.
C. Correct-selects exactly the correct statements/items identified above.
D. Incorrect-omits 1 even though Investors accept lower interest in return for the possible upside of converting to shares.; omits 2 even though Conversion links eventual value to equity prices, offering some-not guaranteed-protection against rising consumer prices.