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ACCOUNTING FOR CONVERTIBLE DEBT
Author(s) -
PURDY DEREK E.
Publication year - 1977
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/j.1468-5957.1977.tb00163.x
Subject(s) - convertible , debt , citation , accounting , convertible bond , history , library science , management , economics , computer science , finance , engineering , structural engineering
1. First, determine the total fair value of the convertible debt with both the liability and equity component. This is straightforward, as this amount is the proceeds received upon issuance. 2. The company then determines the liability component by computing the net present value of all contractual future cash flows discounted at the market rate of interest. This market rate is the rate the company would pay on similar non-convertible debt. 3. In the final step, the company subtracts the liability component estimated in the second step from the fair value of the convertible debt (issue proceeds) to arrive at the equity component. That is, the equity component is the fair value of the convertible debt without the liability component