Abstract The effective yield instead of the cash yield is now used to determine whether a convertible security is a common stock equivalent. The emergence of zero-coupon convertible bonds as a debt instrument has made the cash yield test meaningless in some instances. This paper develops a teaching approach that indicates how effective yield calculations are made and stresses the need to challenge students to efficiently organize and use the resulting data. A decision table for determining common stock equivalency is developed and demonstrated.
Moore et al. (Sun,) studied this question.