Valuation of primary issue convertible bonds

Little empirical evidence is available on the nature of the trade‐offs between the debt‐ and equity‐like components of convertible bonds. Such information would be useful to firms considering the issuance of convertible bonds. Furthermore, complete understanding of the leverage implications of convertible bond issuance depends on the market's view of the proportions of the implicit debt/equity mix. The current study develops a two‐equation model that estimates the relative contributions made to the value of primary issue convertible bonds by the debt and implicit warrant components. The model's distinct approach affords an opportunity to evaluate the empirical relationship between the value of the implicit warrant and the theoretical determinants of that value by isolating the individual components of the convertible bond's value.