What is an Exchangeable Bond?

What are Exchangeable Bonds?

An exchangeable bond is similar to a convertible bond, except that the underlying shares are not those of the issuer itself, but different shares that the issuer typically owns. All other features are the same in terms of premium, option value, discounted coupon and call options.

However, when investors consider the pricing of an exchangeable, they need not to look at the credit of the issuer, but the option value – therefore the dividend, implied volatility and equity outlook of the shares underlying the exchangeable.

Exchangeable bonds do not result in the issuance of new shares and so do not have potential equity dilution attached to them. For issuers, exchangeables can be attractive as they are a way of ‘selling’ the underlying shares at a premium to the current market, if exchanged, as well as getting some low-cost debt financing (as a result of option value from those underlying shares).