The correct answer is Both 1 and 2. Key Points Convertible bonds A convertible bond pays fixed-income interest payments but can be converted into a predetermined number of common stock shares. It is a hybrid security that offers investors the best of both stocks and bonds. It typically carries lower interest rate payments than straight corporate bonds the savings in interest expense can be significant. Investors accept the lower interest payments because the conversion option offers the opportunity to benefit from increases in the stock price. Hence, Statement 1 is correct. Governments might use indexation as a way to potentially alleviate the negative effects inflation can have on the recipients of transfer payments and entitlements. Hence, Statement 2 is correct. Social Security payments, for example, are indexed to the annual increase in the Consumer Price Index. Issuing convertible bonds can help companies minimize the negative investor sentiment that would surround equity issuance. Each time a company issues additional shares or equity, it adds to the number of shares outstanding and dilutes existing investor ownership. The company might issue convertible bonds to avoid negative sentiment. Bondholders can, then, convert into equity shares should the company perform well.