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The impact of a convertible bond on the leverage of a firm
Author(s) -
Borumand Majid,
Shamsa Kaveh
Publication year - 2021
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22505
Subject(s) - convertible bond , capital structure , bond , embedded option , convertible arbitrage , debt , equity (law) , financial economics , leverage (statistics) , business , economics , convertible , monetary economics , finance , capital asset pricing model , political science , computer science , risk arbitrage , structural engineering , machine learning , arbitrage pricing theory , law , engineering
The important issue of the impact of convertible bonds on the capital structure of firms has not attracted much attention. The authors use a binomial tree approach to price a convertible bond with convertibility throughout its life to calculate its debt and equity contribution to the capital structure. The authors will show that treatment of the convertible bonds by simply assigning its straight bond value portion to the debt, and the equity option portion to the owner's equity is not consistent with the foundations of finance theory and drastically overstates the debt component of these bonds and their contribution to the firm's leverage.