Exchangeable bond

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A straight bond with an embedded option 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.

This right is an option in favour of the holder / investor.

In return for this additional valuable right, the investor is generally willing to accept a lower rate of interest on the debt.

This saves interest for the issuer / borrower, at the cost of writing the option.

See also