Convertible Bonds UPSC pre 2022

This was a tough question because statement 2 uses the word Indexation which many aspirants were not able to understand.

With reference to Convertible Bonds, consider the following statements : [2022]

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?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2

Solution: (c)

What are Convertible bonds?

They are hybrid securities that offer investors the best of both stocks and bonds.

Like any other kind of bond, they provide a guaranteed income stream and pay back the amount you originally lent the company.

Statement 1 - As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.

Convertible bonds typically carry lower interest rate payments than straight corporate bonds. So, they can lead to savings in interest expense.

Investors accept the lower interest payments because the conversion option offers the opportunity to benefit from increases in the stock price.

Statement 2-The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.

What is Indexation?

a system in which the value of something changes in relation to another value or fixed standard.

E.g. “Inflation-Indexed Bonds (IIBs)”

Indexation of pay rises to productivity will give people an incentive to work harder.

Governments might use indexation as a way to potentially alleviate the negative effects inflation can have on the recipients of transfer payments and entitlements.

Social Security payments, for example, are indexed to the annual increase in the Consumer Price Index.

coming back to the statement

When Inflation is high but the interest rate on the bond is low then bondholders can convert it to equity if there is a chance of a better dividend from the company.

Therefore convertible bonds give a bondholder a degree of indexation to rising consumer prices or in simple words a method to fight inflation.

Comments

Indirect transfer UPSC pre 2022

This question was an easy question and deals with the Indirect transfer concept. it was easy because it was in regular news due to a decision by the Netherlands arbitration court in 2020-2021. The court has ordered the Indian government to pay $1.2 billion [more than 8 thousand crores] to Cairn energy for tax harassment . Due to this in 2021, the government came up with Taxation laws [Amendment], bill 2021. What are Taxation laws [Amendment], bill 2021? It was an amendment in taxation laws which was focused on ending the retrospective tax issue. In short it says that "if Indirect transfer of Indian asset occurred before May 28, 2012, then the Indian government will not demand taxes on it." If Income tax authorities had collected any taxes from such companies then the Indian government will refund the money to the victim company [with 0% interest]. However, the company need to drop all the cases against the India

Inflation-Indexed Bonds (IIBs) and Positive real Interest rate UPSC pre 2022

The question on Inflation Indexed bonds was Medium level question because it can be done using the elimination method. With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)” ? [2022] 1. Government can reduce the coupon rates on its borrowing by way of IIBs. 2. IIBs provide protection to the investors from uncertainty regarding inflation. 3. The interest received as well as capital gains on IIBs are not taxable. Which of the statements given above are correct? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 TIP No tax exemptions given on “Inflation-Indexed Bonds (IIBs)” Solution - A What is Inflation-Indexed Bond [IIB] ? A bond is a type of security . Inflation Indexed bonds interest rates are linked to the Inflation rate. For e.g. - Inflation Indexed National Savings Securities-Cumulative (IINSS-C) with Interest Rate = CPI + 1.5% Why do we need IIB?

Biofilms UPSC pre 2022

Biofilms UPSC Bacteria are small, Single-celled organisms that we can not see with our naked eyes. While we often think of them as individual free-swimming entities, these resourceful organisms can often be found in groups called Biofilms . Biofilms can also be understood as a social group of Bacteria. To build Biofilms bacteria produce a sticky material that works like glue, called the Biofilms matrix , that helps the bacteria stick to each other and to surfaces. Bacteria stick to each other and expose surfaces creating slimy coatings to protect them from environmental pressure.[the way family and friend help us in managing different stress] Because of their resilience , biofilms can thrive in many environments, including soil, Deep sea and Our food. For humans, Biofilms can be harmful and helpful depending on where they form and the types of Bacteria that live on them. Consider the following statements:- UPSC pre 2022 1. Biofilms c

Search This Blog