Valuing Hybrid Securities and Noncontrolling Interests  349
The value of convertibles depends on the enterprise value. In contrast to 
valuation of straight debt, neither the book value nor the simple DCF value 
of bond cash flows is a good proxy for calculating the value of convertibles. 
Depending on the information available, there are four possible methods to 
apply:
1. Fair value. Companies report the “fair” value of financial instruments, 
including convertible debt, in the notes to the financial statements. 
Companies value these investments using quoted market prices or pric-
ing models, and they disclose the methodology used. Use this value if 
enterprise value has not changed significantly since the last financial 
report.
2. Market price. Many convertible bonds are actively traded with quoted 
prices. For U.S. convertible debt, use the TRACE database to deter-
mine the market value of debt when the enterprise value has materially 
changed since the last filing.
3. Black-Scholes value. When the fair value or market value is inappropri-
ate,21 we recommend using an option-based valuation for convertible 
debt. Accurate valuation of convertible bonds with option-based mod-
els is not straightforward. That said, by following methods outlined 
by DeSpiegeleer, Van Hulle, and Schoutens, you can make a reason-
able approximation applying an adjusted Black-Scholes option-pricing 
model.22
4. Conversion value. The conversion value approach assumes that all con-
vertible bonds are immediately exchanged for equity and ignores the 
time value of the conversion option. It leads to reasonable results when 
the conversion option is deep in the money, meaning the bond is more 
valuable when converted into equity than when held for future coupon 
and principal payments.
Valuing Convertibles  Exhibit 16.4 illustrates all four valuation methods 
for the mobile-payments company Square. Square has not issued traditional, 
fixed-payment debt. Instead, the company issued two convertible bonds: a 
$211.7 million convertible bond due in March 2022 and an $862.5 million con-
vertible bond due in May 2023.23 Because the coupon rate was below the pre-
vailing yield for nonconvertible debt at the time of offering, the bonds are 
21 If you plan to modify enterprise value because of proposed operating changes, the fair value is no 
longer appropriate, as the value of convertible debt will change with enterprise value.
22 For more on the valuation of convertible debt, see, for example, J. DeSpiegeleer, C. Van Hulle, and W. 
Schoutens, The Handbook of Hybrid Securities: Convertible Bonds, CoCo Bonds, and Bail-In (Hoboken, NJ: 
John Wiley & Sons, 2014).
23 Square originally issued $440 million in convertible bonds. Investors have exercised many of the 2022 
convertible bonds, such that only $211.7 million in principal remains as of year-end 2018.