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 certa ...

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; common ...

to exchange the bond for the

stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...

of a company other than the issuer (usually a

subsidiary A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a sa ...

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 or 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 i ...

. 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