![]() It dilutes the stocks in issue for the secondary company if the option is exercised.Stock conversion is an option that may not attract large investments as required by the bond issuers.Disadvantages of an Exchangeable BondĪn Exchangeable bond offers some disadvantages to both parties as well. Investors can feel protection against inflation as they have an investment in a bond and stocks at the same time.Bond issuers can use it for sell-offs and divestments in other companies such as subsidiaries of a group.The bondholders can convert debt with equity for another company and make substantial profits.Bond issuers can raise capital with lower interest rates as compared to a straight bond.It offers investment diversification for investors.READ: Payment in Kind Bonds (PIK): What Are They and How PIK Works? Advantages of an Exchangeable BondĪn Exchangeable bond offers several advantages to the bond issuers and bondholders. It can also be used for a sell-off position in other companies. For instance, it does not dilute the company’s share position as no new shares are issued by the bond issuer. This company is usually the subsidiary company of the bond issuer.īond issuers can enjoy several advantages with an exchangeable bond. On the other hand, it offers a stock exchange with stocks owned by another company. However, the key difference between the two is the stocks converted through a convertible bond are owned by the bond issuer itself. Both come with an option of conversion but not an obligation. Both types of bonds give the bondholders an option to exchange debt with equity. Special Considerations with an Exchangeable Bond – Difference from Convertible BondĪn exchangeable bond and a convertible bond work similarly. Contrarily, if the share price of the subsidiary falls below $30, the investors wouldn’t exercise the exchange option as it will incur losses. The investor would sell the bond and exchange it with stocks of the subsidiary company earning a profit of $ 10 per share. If at the time of exchange, the stock price goes above $30, say to $ 40. The subsidiary’s stock is currently trading at $ 30. The embedded option of exchange is 50:1 for its subsidiary. It offers an exchangeable bond at a par value of $ 1,000. Suppose a company wants to raise capital through an exchangeable bond. Investors would make an exchange if the stock price rises above $ 20 and would let the option lapse if the price falls below $20. In other words, you can own the stocks of the company at $ 20 per share with a 50:1 exchange offer. READ: What is a Put Warrant and How Does it Work? It means for the par value of a bond $1,000 you can exchange 50 stocks of the company. For instance, a bond issuer can offer a stock exchange with a 50:1 ratio. It can offer stock conversion at different rates. Additionally, the issuer offers an embedded option of stock exchange at a specified date and price. The bond pricing, maturity, coupon rate, and other terms are agreed upon in a similar way to a straight bond. How Does an Exchangeable Bond Work?Īn exchangeable bond can be viewed as a straight bond plus an embedded option for exchange with equity. At the same time, investment in an exchangeable bond offers a diversification of risk as it involves another company for the stock exchange. Another with the performance of the company that comes with an exchange offer. One with the interest rate and hence the performance of the bond itself. The investors of an exchangeable bond are exposed to different kinds of risks. The exchange feature works similarly to a convertible bond. This company is usually a subsidiary of the company issuing bonds. What is an Exchangeable Bond?Īn exchangeable bond can be converted into stocks of a company other than the bond issuer. The value of an exchangeable bond is always higher than a straight bond as it comes with a call option for conversion. ![]() At the same time, investors face a higher risk that comes through the stock performance of another company. The investors keep the option of converting the bond into equity but not the legal obligation.Īn exchangeable bond offers embedded diversification of risk for the investors. An exchangeable debt or bond can be converted into equity of a company other than the issuer of the debt.
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