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 certai ...
consisting of a straight
bond
Bond or bonds may refer to:
Common meanings
* Bond (finance), a type of debt security
* Bail bond, a commercial third-party guarantor of surety bonds in the United States
* Chemical bond, the attraction of atoms, ions or molecules to form chemica ...
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; common ...
to exchange the bond for the
stock of a company other than the issuer (usually a
subsidiary 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. 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