Hybrid securities share some of the characteristics of debt and some of the characteristics of equity
They can be broken down into their debt and equity components and treated separately
The convertible bond can be valued as if it were a straight bond, using the rate at which the firm can borrow in the market, given its default risk (pretax cost of debt) as the interest rate on the bond. The difference between the price of the convertible bond and the value of the straight bond can be viewed as the value of the conversion option
An option pricing model can also be used to value the conversion option
