Stripping different components of convertible bonds A convertible bond consists of 3 components bond component -interest rate risk equity component-equity risk credit quality component credit risk coupon payment periodic Default risk Fixed income Financial payment protection Investor e principal- Institution ayment provider upon default holding ig a convertible bond9 Stripping different components of convertible bonds A convertible bond consists of 3 components • bond component – interest rate risk • equity component – equity risk • credit quality component - credit risk holding a convertible bond Fixed income investor Financial institution Default risk protection provider coupon payment principal periodic payment payment contingent upon default