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. A

   1 only

   1 only. The equity kicker is also a partial inflation hedge, so 2 holds.

2. B

   2 only

   2 only. Convertibles do pay a lower coupon because of the option.

3. C

   Both 1 and 2

   Both. Lower coupon for the conversion option; equity upside indexes the holder to rising prices in part.

4. 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.