Convertible asset swap - Financial definition
Concise definition of the term convertible asset swap
A convertible asset swap is an asset swap where the underlying asset is a convertible bond.
Comprehensive definition of the term convertible asset swap
Typically, a bank purchases a convertible bond and sells it to an investor for its fixed-income value. In parallel, the investor enters into a swap where the bank exchanges fixed-rate coupon payments on the convertible bond for a floating rate.
The swap contract also contains an option giving the bank the right to call the bonds back at any time and so terminate the agreement (hence the asset swap is callable).
The swap contract also contains an option giving the bank the right to call the bonds back at any time and so terminate the agreement (hence the asset swap is callable).
The investor thus actually owns a callable floating-rate note. In exchange for the equity option which is embedded in the convertible bond, he will receive a higher spread on the floating-rate payments from the swap.