[Solved] With the Reference of Convertible Bonds, Consider the following Statements: As there is an option to exchange the bond of equity. Convertible Bonds pay a lower rate of Interest The option to Convert to equality Affords the bondholder degree of indexation to raising consumers prices. Which of the statements given above is/are correct?

Q65) With the Reference of Convertible Bonds, Consider the following Statements:

1. As there is an option to exchange the bond of equity. Convertible Bonds pay a lower rate of Interest
2. The option to Convert to equality Affords the bondholder degree of indexation to raising consumers prices.

Which of the statements given above is/are correct?

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

Answer: 3

• An interest-bearing fixed-income corporate debt security known as a convertible bond has the option of being converted into a predetermined number of shares of common stock or equity.
• During the bond’s term, the conversion from bond to stock is possible at specific times and is typically at the bondholder’s discretion.
• They provide a lower coupon rate because there is an option to convert the bond into common stock.
• Indexation means adjusting a price, wage, or other value based on the changes in another price or composite indicator of prices. Indexation can be done to adjust for the effects of inflation, cost of living, or input prices over time, or to adjust for different prices and costs in different geographic areas.
• The bondholder is given some indexation to rising consumer prices thanks to the option to convert to equity. Indexation will make sure that prices are eventually adjusted to reflect inflation.
• Bondholders will be able to reduce their long-term capital gains with the aid of indexation even when converting their bonds into equity, which lowers their taxable income, because their investment will be adjusted with inflation.