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?

1. Statement 1 — Correct. Convertible bonds carry a conversion option into equity; because this option has value to investors, issuers usually pay a lower coupon/interest rate than on comparable non-convertible bonds.

2. Statement 2 — Correct. If consumer prices rise, company revenues/profits and hence equity prices may also rise over time; the conversion option gives the bondholder some participation in that upside, offering a degree of inflation indexation, though not a perfect one.

Therefore, both statements are correct.