Gross Primary Deficit Calculation
Question
With reference to Convertible Bonds, consider the following statements: Which of the statements given above is/are correct?
- 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.
Options
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Explanation
Both statements are correct.
Convertible bonds give the holder the lucrative option to convert debt into stock. Because of this upside potential, investors accept a lower coupon/interest rate upfront. Additionally, since stock prices generally rise alongside inflation, the conversion option provides a natural hedge (indexation) against rising consumer prices.
Answer: (c).
Question details
Year
2025
Paper
GS Paper 1
Question
Q65
Subject
Economy
Sub-topic
Fiscal Policy, Taxation & Budget
Type
Factual single
Difficulty
Hard
Nature
Static
Source hint
Corporate Debt Market & Convertible Hybrid Instruments
Same sub-topic — other years
Fiscal Policy, Taxation & Budget has appeared in multiple papers:
See all questions on Fiscal Policy, Taxation & Budget
Browse every tagged question across all years