Question on convertible bond

[Leo]

1. If a convertible bond doesn't provide with mandatory redemption, but has a conversion option at the holder's discretion to be converted into a variable number of common shares, would the convertible bond include an equity host and an embedded derivative or, a liability in its entirety?

2. If a convertible bond doesn't provide with mandatory redemption, but has a conversion option at the holder's discretion to be converted into preference shares. And if the preference shares are debt instrument in nature, would the convertible bond include an equity host and a liability component, or it's simply a liability in its entirety?

Thank you

[Ketan Marwah]

1. Liability - hopefully answered in your other post.
2. Liability - as all alternatives results in a liability.

[Leo]

agree with the item 2, but disagree with the item 1. Please let's discuss, please have a look at this case, don't you think they are similar? Thanks!

[Ketan Marwah]

Hi,

'Perpetual' debt instruments are considered financial liabilities if the issuer is contractually obliged to pay interest, even without the need to redeem the principal (IAS 32. AG6). Since you have nowhere stated anything about interest in your example therefore I am inclined to also see this as an Equity instrument provided it satisfies the definition of an equity instrument. Moreover, I would agree on the presence of an embedded derivative as the conversion feature do not meet the definition of equity.

Good discussion to have. Thanks.

[Leo]

Yes, let's assumed it's interst free or dividend at the discretion of the issuer.