If an entity issued a convertible note at a price of $40.00 and it was determined that a debt instrument of similar risk and rate of interest of 10%-but without the option to convert to equity-could be sold for $32.00,what would be the equity component of the convertible note?
A) $40.00
B) $32.00
C) $8.00
D) $12.00

Question

Quizplus · Accepted Answer

To determine the equity component of the convertible note, we need to find the difference between the price of the note ($40.00) and the fair value of the debt instrument ($32.00), which is $8.00. This represents the value of the conversion option embedded in the note, which is the amount that investors are willing to pay for the right to convert the note to equity. Therefore, the answer is C) $8.00.

If an Entity Issued a Convertible Note at a Price