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.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Correct answer
Explanation
The correct answer is C, both 1 and 2. Investors accept a lower coupon on a convertible bond in return for the option to become shareholders, and that option gives some protection against rising prices.
A convertible bond is a debt instrument that the holder may exchange for a fixed number of the issuing company's shares at set times. The conversion option has value of its own, so companies can borrow more cheaply than with an ordinary bond, which is why the interest rate is lower. A fixed coupon loses real value when consumer prices rise, but company earnings and share prices usually rise in nominal terms along with inflation. Since the holder can switch into shares, part of that gain is available, giving a measure of indexation that a plain bond lacks. Until conversion the holder still gets regular interest.
A is wrong because statement 2 is also true. B is wrong because statement 1 is also true. D is wrong because both statements are correct.
Exam tip: Convertible bond = lower coupon plus an equity option, a partial hedge against inflation.
Practice Questions
View allThe Nehru-Mahalanobis Strategy of Development was implemented for the first time by which one of the following Five-Year Plans?
- A.First Five-Year Plan
- B.Second Five-Year Plan
- C.Third Five-Year Plan
- D.Seventh Five-Year Plan
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The Second Plan (1956–61) was built on the model prepared by the statistician P. C. Mahalanobis, which gave priority to heavy and basic industries.
Read the full explanation →The Insolvency and Bankruptcy Board of India (IBBI) was established in the year
- A.2014
- B.2015
- C.2016
- D.2017
Show answer
The Insolvency and Bankruptcy Board of India was set up on 1 October 2016 under the Insolvency and Bankruptcy Code, 2016.
Read the full explanation →Consider the following statements : 1. An additional spending by the Government of ₹ X is likely to have less impact on income than an additional transfer of ₹ X to households. 2. An additional spending by the Government of ₹ X is likely to have less impact on income if it is not accompanied by an expansion in money supply. Which of the statements given above is/are correct ?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
Government spending adds to income more than an equal transfer, and its effect is smaller when money supply is not expanded alongside it.
Read the full explanation →Which one of the following central features is not associated with Capitalist Economy?
- A.There is generalised commodity production - it has market value.
- B.Productive wealth is held predominantly in private hands.
- C.Economic life is organised according to market principles.
- D.Economic organisation is based on planning, a supposedly rational process of resource allocation.
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Allocation of resources through central planning is the mark of a socialist or command economy, not a capitalist one. In a capitalist economy, the means of production such as land, factories and capital are owned mainly by private individuals and firms.
Read the full explanation →Consider the following statements:
I. The Second Five-Year Plan sought to promote development which would establish socialistic pattern of society in India.
II. Between 1966 and 1969, three Annual Plans were formulated.
III. The Ninth Five-Year Plan could not take off at its stipulated time in the 60th year of India's Independence.
Which of the statements given above are correct?
- A.I and II only
- B.I and III only
- C.II and III only
- D.I, II and III
Show answer
Statements I and II are true, but the Ninth Plan began in 1997, the fiftieth year of Independence, not the sixtieth.
Read the full explanation →