A Re‐examination of the Case for Accounting Separately for the Debt and Equity Features of Convertible Debt | Zendy

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A Re‐examination of the Case for Accounting Separately for the Debt and Equity Features of Convertible Debt

Author(s) -

Casson Peter

Publication year - 1998

Publication title -

journal of business finance and accounting

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 1.282

H-Index - 77

eISSN - 1468-5957

pISSN - 0306-686X

DOI - 10.1111/1468-5957.00203

Subject(s) - convertible bond , warrant , equity (law) , bond , business , debt , convertible , accounting , convertible arbitrage , economics , financial economics , finance , structural engineering , law , engineering , capital asset pricing model , arbitrage pricing theory , risk arbitrage , political science

The case for accounting separately for the debt and equity features of a convertible bond is based on two main assumptions: convertible debt can be decomposed into two, or more, fundamental financial instruments, and a convertible bond has the same economic substance as a bond with a detachable warrant. These assumptions are re‐examined in this paper where it is shown that it is generally not possible to decompose a convertible bond into fundamental financial instruments, nor is it possible to form a package of a bond and a detachable warrant that replicates the character of the convertible bond.

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