Correct answer: (c) Both 1 and 2
Explanation
- A
1 only
1 only. The equity kicker is also a partial inflation hedge, so 2 holds.
- B
2 only
2 only. Convertibles do pay a lower coupon because of the option.
- C
Both 1 and 2
Both. Lower coupon for the conversion option; equity upside indexes the holder to rising prices in part.
- D
Neither 1 nor 2
Neither. Both are standard convertibles lore.
Summary. Official key is (c) both. A convertible pays a lower yield because the holder owns a call on equity. That equity link gives some indexation if consumer prices and share prices rise together.
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