Obviously there is a clear distinction between busted convertible and hybrid.
Is there a line between hybrid and stock equivalent? or is it just gray zone?
A convertible bond is a hybrid security.
A busted convertible is when the convertible bond is out of the money so its value is like a straight bond.
When the convertible bond is in the money (its value is higher than its intrinsic straight bond value), it is considered to be stock equivalent.
What do you mean with “line between hybrid and stock equivalent”?
Thanks for the answer. There is a page in fixed income (p369) that talkd about the convertible behaves very much bond-like (i.e. busted) when the share price is < conversion price.
As share price goes above the conversion price, the convertible behaves like a hybrid equity and bond (the book called this “hybrid”). As the share price goes up even further, the convertible will have more equity-like qualities and less bond-like (the book called this “equity equivalent”)
I am just wondering whether there is a cut-off between a hybrid and an equity equivalent.
There’s no precise cutoff.
If you’re 5’11" and weigh 100 lbs., you’re skinny.
If you’re 5’11" and weigh 300 lbs., you’re fat.
Somewhere between 100 lbs. and 300 lbs., you’re neither skinny nor fat.
What’s the exact cutoff?