Convertible Bonds: How Much Equity, How Much Debt?

Posted: 5 May 2005

See all articles by Marcelle Arak

Marcelle Arak

University of Colorado at Denver - J.P. Morgan Center for Commodities; University of Colorado at Denver - Department of Finance

Ann Martin

University of Colorado at Denver

Abstract

Financial analysts need accurate estimates of debt, equity, leverage, and EPS. The method proposed here, based on the probability of conversion, yields new estimates of the debt and equity in a convertible bond issue. When this method is used, the value of the equity component in a hypothetical issue is found to be substantial - larger than the value of the options and clearly larger than zero, which is assigned under current accounting rules. The estimate of the debt component is smaller than recorded under current accounting rules. Thus, the leverage of convertible bond issuers is substantially lower when this method is used.

Keywords: Debt Investments, Bonds with Embedded Options, Financial Statement Analysis, Financial Accounting Standards and Proposals, Financial and Ratio Analysis

Suggested Citation

Arak, Marcelle and Martin, Ann, Convertible Bonds: How Much Equity, How Much Debt?. Available at SSRN: https://ssrn.com/abstract=713844

Marcelle Arak (Contact Author)

University of Colorado at Denver - J.P. Morgan Center for Commodities ( email )

The Business School
1475 Lawrence St.
Denver, CO 80202
United States

University of Colorado at Denver - Department of Finance ( email )

1250 14th St.
Denver, CO 80204
United States
303-595-4007 (Phone)
303-628-1299 (Fax)

Ann Martin

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
2,181
PlumX Metrics