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?
Answer & explanation
Answer: (c) Both 1 and 2
UPSC's key treats both statements as correct. A convertible bond can be swapped for the issuer's shares; a plain fixed-interest bond loses purchasing power when prices rise.
- ✓ 1. UPSC's official key treats this statement as correct; we could not confirm the detail from an official source, so we do not explain it here.
- ✓ 2. Interest on a plain bond is a fixed amount, and inflation reduces the purchasing power of a fixed rate of interest. UPSC's official key treats this statement as correct; we could not confirm the rest of the detail from an official source, so we do not explain it here.
Remember · Convertible bond = bond plus option to turn into shares. A plain fixed-interest bond loses purchasing power to inflation.
Sources
- FINRA (US), Bonds: glossary of terms ↗ · reference work “A convertible bond is a bond with the option to convert into shares of common stock of the same issuer at a pre-established price.”
- US SEC, Investor.gov glossary: Convertible Securities ↗ “A "convertible security" is a security—usually a bond or a preferred stock—that can be converted into a different security—typically shares of the company's common stock.”
- US SEC, Investor.gov: Bonds ↗ “Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.”
Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 1 Oct 2026 (how we verify). ·