How Does a Convertible Bond Function as a Hybrid Financial Instrument?
A convertible bond is a hybrid instrument because it combines the features of a debt instrument (a bond) and an equity instrument (a stock option). It pays regular interest like a bond but gives the holder the option to convert the principal into a specified number of shares of the issuing company's common stock.
This embedded option provides the holder with potential equity upside while retaining the downside protection of a bond.
Glossar
Debt Instrument
Collateral ⎊ Debt instruments within cryptocurrency, options trading, and financial derivatives represent contractual obligations secured by underlying assets, functioning as a mechanism for mitigating counterparty risk.
Convertible Bond Function
Valuation ⎊ Convertible Bond Function, within cryptocurrency derivatives, represents a dynamic pricing model adapting traditional fixed-income principles to nascent digital asset markets.
Bond
Valuation ⎊ A bond, within the context of cryptocurrency derivatives, represents a debt instrument referencing an underlying asset ⎊ often a stablecoin or a basket of crypto assets ⎊ with a predetermined repayment schedule and interest rate, functioning analogously to traditional fixed-income securities but introducing counterparty risk specific to the digital asset space.