A financial instrument whose value is not determined or based on the value or performance of an underlying asset. For example, non-derivative financial instruments include cash and cash equivalents, receivables, available for sale financial assets (AFS financial assets), and trade payables.

In accounting, the issuer of a non-derivative financial instrument evaluates the terms of the financial instrument in order to identify its components (a liability and an equity component), and have them classified separately as financial liabilities, financial assets or equity instruments. A compound financial instrument is by nature a non-derivative financial instrument that, for an issuer, contains liability and equity components. The issuer cannot treat such an instrument as either a liability or equity at a time.

A convertible bond is a compound financial instrument as it consists of a liability (representing the issuer’s obligation to pay interest or coupon and potentially to redeem the bond in cash at maturity and an equity (the holder’s call option for issuer’s shares (the choice of a fixed amount of shares instead of a fixed amount of cash).