With reference to Convertible Bonds, consider the following statements:
1. As there is an option to exchange t

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 ?

Accepted Answer

Convertible bonds typically offer a lower interest rate compared to non-convertible bonds because they provide the additional benefit of potential equity appreciation. This conversion feature allows bondholders to participate in the company's growth, acting as a hedge against inflation and rising consumer prices by linking returns to potential stock market gains.