In a convertible note,the embedded option to convert the liability into the equity of the issuer has a fair value of zero on initial recognition when the option is out of the money.

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On initial recognition, even if the option to convert the liability into equity (embedded in a convertible note) is out of the money, it does not necessarily have a fair value of zero. The fair value is determined based on the potential for the option to become valuable over time, considering factors like volatility, the term of the note, and the likelihood of the underlying equity's value increasing.

In a Convertible Note,the Embedded Option to Convert the Liability