This excel file below shows you how to a convertible instrument is reconciled with the P&L, balance sheet and cash flow. It can be toggled between both scenarios whereby the instrument is repaid as a debt or converted to shares (equity) in the business.
Layman explanation:
A convertible instrument embeds both debt and equity features. The investor takes on equity upside (and downside), hence the coupon of the convertible is typically lower than its straight bond counterpart. To simulate this, set the CB coupon in the sheet above to the straight bond coupon, the equity component should be zero - implying that both CB and a straight bond are basically the same.
To get the value of the straight bond, we do a simple NPV on the straight bond coupon payments and the principal at maturity. Because the coupon rate of the straight bond is higher than the CB coupon, the resulting value would be lower.
This difference in value of the straight bond and the CB issue size is basically the equity value of the CB.