In finance, an exchangeable bond (or XB) is 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. An exchangeable bond is different from a convertible 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, 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 a exchangeable bond is always higher than the price of a straight bond because the option to exchange adds value to an investor;
Yield on a exchangeable bond is lower than the yield on a straight bond.
