If the stock price rises substantially above the conversion price, an advantage to the corporation would be: A. the premium would decrease. B. the floor price would offer the investor downside protection.
Full Answer
What is the'conversion price'?
What is the 'Conversion Price'. The conversion price is the price per share at which a convertible security, such as corporate bonds or preferred shares, can be converted into common stock. The conversion price is calculated from the conversion ratio and determined when the convertible security is issued.
What is the market conversion price?
The market conversion price is the amount investors pay per share when exercising their option to exchange convertible securities, typically bonds or preferred stock, into common stock. The market conversion price is calculated by dividing the convertible security's market price by its conversion ratio .
Should you convert a convertible option to common shares?
If the stock trades below the market conversion price, converting the security into common shares makes little sense. Only when the shares rise above the market conversion price is it potentially advantageous to cash in on the convertible option.
How does the conversion ratio affect the value of shares?
The conversion ratio will initially value the security at more than its current market value, making conversion desirable only if a company's common shares rise significantly. Attractive conversion prices will likely motivate investors to exercise their options, diluting the value of a company's shares.
What Is the Market Conversion Price?
The market conversion price is the amount investors pay per share when exercising their option to exchange convertible securities, typically bonds or preferred stock, into common stock. The market conversion price is calculated by dividing the convertible security's market price by its conversion ratio .
What is the conversion ratio of a convertible security?
When an investor purchases a convertible security, it will often be associated with a conversion ratio that predetermines the number of shares the investor will receive by choosing to convert the security. The conversion ratio, which for convertible bonds can be found in the bond indenture or for convertible preferred shares in the security prospectus, will initially value the security at more than its current market value, making conversion desirable only if a company's common shares rise significantly.
How to calculate convertible security?
It is calculated by dividing the convertible security's market price by its conversion ratio— the number of common shares a convertible security can be converted into.
Why are convertible securities sought?
Because fluctuations in the convertible security's market price affect the market conversion price, convertible security holders can profit in situations ...
Why are conversion prices attractive?
Attractive conversion prices may motivate many investors to exercise their options, although doing so could dilute the value of a company's shares, impacting existing stockholders. As a result, potential investors should always be cognizant of the convertible securities offered by companies they invest in.
Why do companies use convertible securities?
Meanwhile, from the perspective of the holding companies, the conversion prices of convertible securities help them to assess the value of their stock and determine the levels of financing that may possibly be raised down the line.
What is a 5:1 bond?
For example, a 5:1 ratio means that one bond would convert to five shares of common stock. Ultimately, it is up to each investor to strategically determine if and when to follow through on the option to exchange their security for common stock, or to hold onto it until it reaches its full maturity. If the stock trades below ...
What is the Conversion Price?
The conversion price is the price per share at which a convertible security, such as corporate bonds or preferred shares, can be converted into common stock. The conversion price is set when the conversion ratio is decided for a convertible security. The conversion ratio can be found in the bond indenture (in the case of convertible bonds) or in the security prospectus (in the case of convertible preferred shares).
What is embedded conversion option?
Companies are willing to pay a little more, and investors are willing to accept a little less, for the embedded conversion option that allows holders of convertible securities to convert to common shares if the price of common shares reaches the conversion price.
Why is the conversion price higher than the current price?
Usually, the conversion price is set at a significant amount higher than the current price of the common stock to make conversion desirable only if a company's common shares experience a significant increase in value. The conversion price is set by management as part of the conversion ratio before the convertibles are issued to the public.
Why is the conversion price important?
The Importance of the Conversion Price. The conversion price is part of determining the number of shares to be received upon conversion. If shares never close above the conversion price, the convertible bond is never converted to common shares.
Is equity better than debt?
Equity may cost more to raise than debt, but it doesn't need to be paid back. From the investor's perspective, bonds are safer, but they have a limited return. Equity provides an opportunity for share price appreciation, but no protection in case of company default.
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