Convertible bonds are corporate bonds which pay the holder regular coupons and may be converted into the underlying shares at the holder's discretion. Here we focus on their exposure to the credit of the issuer. At low equity prices, when the equity optionality is worth little, the convertible is essentially a pure bond and it is clearly correct to price (i.e. discount cash flows) with the full credit spread of the issuer. However, it is generally held that a company's ability to issue stock is not strongly influenced by its credit rating. Accordingly, the value contributed to the bond by its conversion rights should not be subject to the same risky discounting as the fixed payments.
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