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Exchangeable bond (orXB) is a type ofhybrid security consisting of a straightbond and anembedded option to exchange the bond for thestock of a company other than the issuer (usually asubsidiary or company in which the issuer owns a stake) at some future date and under prescribed conditions.[1] An exchangeable bond is different from aconvertible 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,[2] splitting it in straight debt part and an embedded option part and valuing the two separately.
Price of exchangeable bond = price of straight bond + price of option to exchange
