Cost of convertible debt — Accounting glossary

A simplified estimate of convertible debt cost discounts the issuer's after-tax interest payments and the relevant terminal redemption or expected conversion value to the current market value, or to net issue proceeds when the question requires an issue cost. The resulting rate is an IRR. Select the terminal outcome using the conversion terms and the question's assumptions; expected share prices and conversion are uncertain. The treatment of tax, timing and issue costs must be consistent. Advanced valuation may model the conversion option more explicitly.

Worked example

A one-year convertible trades ex-interest at $100, pays $8 interest and is expected to be converted into shares worth $110 at maturity. With usable 25% interest relief and no other effects, the issuer's simplified after-tax cost solves $100 = ($6 + $110)/(1 + r), so r = 16%.

Common mistake

Using the coupon rate alone, ignoring the conversion value or applying tax relief to the conversion amount as though it were interest.

Where it appears in your exams

Qualification	Exam	Relationship	Period
ACCA	AFM	Supporting	September 2026–June 2027
ACCA	FM	Direct	September 2026–June 2027