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?

Options

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

Correct Answer

Both 1 and 2

Explanation

Convertible bonds pay lower interest since they offer equity conversion benefits. They are not indexed to consumer prices, so statement 2 is incorrect.

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