An equity derivative, essentially a fixed-income security, whose coupon and/ or final principal repayment is/ are pegged to the return on an equity instrument or investment (such as a stock, portfolio of stocks or stock market index). An equity-linked bond combines the features of both debt and equity as it contains an option to purchase (either by conversion of existing debt or by exercising the right to purchase) an equity stake in the issuer at a preset price.
This instrument is usually issued at times stock market prices are rallying as it allows companies to raise funds at lower than market interest rates, and enable investors to receive interest payments and potentially lock into future capital gains.
Comments