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?

Both statements are correct because the conversion feature acts as a "sweetener," allowing issuers to offer lower interest rates in exchange for potential capital appreciation (Statement 1), while the ability to switch to equity provides a hedge against inflation since stock prices typically rise with consumer prices (Statement 2). Option (a) is the most tempting wrong choice for candidates who overlook that equity conversion offers "indexation" by protecting the bondholder from the purchasing power risk inherent in fixed-income debt. The core concept tested is the hybrid nature of convertible bonds and how their dual characteristics influence yield and inflation protection.