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

Peter Casson

Journal of Business Finance & Accounting, 1998, vol. 25, issue 5‐6, 595-612

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.

Date: 1998
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