1. When bondholders convert bonds into stocks, there are two accounting methods to choose from: book value method and market value method. Using the book value method, the book value of the convertible bonds is taken as the value of the converted shares, and the conversion gains and losses are not recognized. Those who agree with this approach believe that the company cannot generate profits and losses due to the issuance of securities, and even if it does, it should be treated as (or reduced) capital reserve or retained profits and losses. In addition, the purpose of issuing convertible bonds is to convert bonds into stocks. Issuing stocks and convertible bonds is a complete transaction, not two independent transactions. No profit or loss is recognized during the conversion period.
Two, under the market price method, the value of the converted stock is based on the market price or the market price of the converted bond, which is more reliable. The market price method is adopted because the bond conversion is an important stock activity of the company and the market price is quite reliable. According to the two information quality requirements of relevance and reliability, the conversion gains and losses are confirmed respectively. In addition, the market price method also conforms to the historical cost principle.
3. Other types of convertible securities include: convertible bonds (convertible into shares of companies other than the issuing company), convertible preferred shares (convertible into common shares) and compulsory convertible securities (a short-term securities, usually with high yield, which are forcibly converted into company shares according to the stock price on the maturity date).
Four, from the issuer's point of view, the main advantage of convertible bond financing is that it can reduce the interest cost, but if the bond is converted into shares, the equity of the company's shareholders will be diluted. From the pricing point of view, convertible bonds are composed of bonds and warrants. For the pricing of convertible bonds, we need to assume that: 1 corresponds to the price fluctuation degree of stocks, so as to price warrants; 2. The spread of fixed-income bonds is determined by the company's credit rating and the priority repayment level of bonds (the repayment order of various debts when the company cannot pay off all debts). If the market value of convertible bonds is known, the implied volatility of stock prices can be calculated by assuming bond spreads, and vice versa. This volatility/credit division is the standard pricing method for convertible bonds. Interestingly, apart from the above-mentioned convertible bonds, it is impossible to completely separate the fluctuation of stock price from credit. High volatility (beneficial to investors) is usually accompanied by credit deterioration (unfavorable). Good convertible bond investors are those who can strike a balance between the two.