Exchangeable bond (or XB) is a type of

hybrid security Hybrid securities are a broad group of securities that combine the characteristics of the two broader groups of securities, debt and equity. Hybrid securities pay a predictable (either fixed or floating) rate of return or dividend until a cert ...

consisting of a straight bond and an

embedded option An embedded option is a component of a financial bond or other security, which provides the bondholder or the issuer the right to take some action against the other party. There are several types of options that can be embedded into a bond; comm ...

to exchange the bond for the

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

of a company other than the issuer (usually a

subsidiary A subsidiary, subsidiary company, or daughter company is a company (law), company completely or partially owned or controlled by another company, called the parent company or holding company, which has legal and financial control over the subsidia ...

or company in which the issuer owns a stake) at some future date and under prescribed conditions. An exchangeable bond is different from a

convertible bond In finance, a convertible bond, convertible note, or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in ...

. A convertible bond gives the holder the option to convert bond into shares of the issuer. The pricing of an exchangeable bond is similar to that of convertible bond, splitting it in straight debt part and an embedded option part and valuing the two separately.

Pricing

Price of exchangeable bond = price of straight bond + price of option to exchange * Price of an exchangeable bond is always higher than the price of a straight bond because the option to exchange adds value to an investor. * Yield on an exchangeable bond is lower than the yield on a straight bond.

References

External links

{{Corporate finance and investment banking , state=collapsed Fixed income analysis Debt Commercial bonds Embedded options