A re-examination of the case for accounting separately for the debt and equity features of convertible debt.

Casson, Peter (1998) A re-examination of the case for accounting separately for the debt and equity features of convertible debt. Journal of Business Finance & Accounting, 25 (5&6), 595-612. (doi:10.1111/1468-5957.00203).

Record type: Article

Abstract

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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