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Hybrid securities

Convertible Bonds: Half Bond, Half Option

Imagine a bond that can transform into stock. That is a convertible bond. Chapter 33 of Wilmott’s book dives into one of the most fascinating instruments in finance, a hybrid security that sometimes acts like debt and sometimes acts like equity. It sounds simple on the surface, but underneath it is a deeply complex contract involving American option features, stochastic interest rates, path dependence, dilution, and credit risk.

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