Premium
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.