Apedia Logo Apedia
Join

Choose Language

Select your preferred reading language
🇬🇧
English
✔
🇮🇳
हिन्दी
✔
✕
Full View
Economy
Financial Markets
EN हिंदी
✕
UPSC Prelims 2022 Paper-1 📅 05 Jun, 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?

A
(a) 1 only
B
(b) 2 only
C
(c) Both 1 and 2
D
(d) Neither 1 nor 2
Result Summary
Logo

APEDIA

UPSC Prelims
2022 • 05 Jun, 2022 • Paper-1
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?
Correct Answer
(c) Both 1 and 2
Yield Dynamics: Statement 1 is correct. Convertible bonds purposefully provide investors with the highly valuable option to convert their fixed debt into compan......
Ref/Book : UPSC Prelims 2022
Ref. Subject Economy
Chapter -
Ref. Topic Financial Markets
Pg. No -
💡 Analysis & Explanation
Yield Dynamics ▼
Statement 1 is correct. Convertible bonds purposefully provide investors with the highly valuable option to convert their fixed debt into company stock at a later date. Because of this lucrative equity-upside potential, corporate issuers can successfully clear the market offering a noticeably lower coupon rate (interest) compared to standard, non-convertible corporate bonds.
Inflation Hedge Mechanism ▼
Statement 2 is correct. Standard bonds suffer heavily during inflation as their fixed payouts rapidly lose purchasing power. However, the equity conversion feature acts as a natural hedge; as inflation organically drives up nominal corporate revenues and subsequently stock prices, the bondholder can convert to equity and benefit from capital appreciation, essentially indexing their overall returns to consumer price rises.
Conclusion ▼
Both statements correctly analyze the financial mechanics and investor benefits of convertible bonds.
← Prev
65 / 100
Next →