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GS Paper IUPSC Prelims 2022
Industry & Infrastructure
Question No. 355Interactive Test Mode
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+2-0.66

Q355. 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?

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?
Select the correct option below (or cross out options to eliminate)
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Official Answer Key & Detailed Solution

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Official UPSC Answer KeyUPSC Prelims 2022 • Indian Economy

Correct Answer: Option (C) — Both 1 and 2

Concept & Option Breakdown

Standard Reference Verified
  • Statement 1 is correct: Because convertible bonds give investors the valuable embedded option to convert debt into equity shares of the issuing company, investors accept a lower coupon (interest) rate compared to conventional non-convertible bonds.
  • Statement 2 is correct: Equity valuations and company earnings generally appreciate during inflationary times. By holding the option to convert debt into equity, the bondholder gains exposure to stock appreciation, providing a hedge/indexation against rising consumer inflation.
Elimination Heuristic & Exam Approach

The equity conversion option adds value, so the issuer pays less interest (Statement 1 is true). Equities provide inflation protection, so the conversion option hedges inflation (Statement 2 is true).

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Question Specifications & Syllabus Mapping

Examination & YearUPSC Civil Services Preliminary Examination 2022 (Q355)
Paper & Marking SchemeGS Paper I • 2 Marks (-0.66 Negative for incorrect response)
Syllabus Subject & TopicIndian Economy → Industry & Infrastructure
Official Answer KeyOption (C) — Both 1 and 2

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Frequently Asked Questions — UPSC Prelims 2022 Q355

What is the official answer for UPSC Prelims 2022 GS Paper I Question 355 (Indian Economy)?

The official UPSC answer key for this 2022 Indian Economy (Industry & Infrastructure) question is Option (C): "Both 1 and 2". Correct attempts carry 2 Marks with -0.66 Negative penalty for wrong answers.

Which UPSC Prelims syllabus topic does this 2022 question belong to?

This question belongs to GS Paper I under the subject "Indian Economy" and micro-topic "Industry & Infrastructure". You can explore all repeated questions from Industry & Infrastructure in Acme AI's 3D Prelims PYQ Realm or practice 50 full-length and sectional tests in the APT Prelims Test Series.

How can I solve this Industry & Infrastructure UPSC Prelims question using option elimination?

The equity conversion option adds value, so the issuer pays less interest (Statement 1 is true). Equities provide inflation protection, so the conversion option hedges inflation (Statement 2 is true).

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