Conversion Parity Price
What is the Conversion Parity Price?
The conversion parity price alludes to the break-even price on a convertible security. This is the amount paid for a share in the event that the option on a convertible security is worked out. Convertible securities like convertible bonds are purported on the grounds that they have a feature where the security can be changed into stock of the responsible company. The conversion parity price is the effective price paid by the investor.
How the Conversion Parity Price functions
The conversion parity price is calculated by partitioning the current value of the convertible security by the conversion ratio, which is the number of shares a convertible security can be changed over into.
Conversion Parity Price = Value of Convertible Security/Conversion Ratio
For instance, assume an investor had a convertible bond with a current market price of $1,000 that could be changed over into 20 shares of common stock in the responsible company. The conversion parity price would be $50 ($1,000/20 shares). Assuming the current value of the company's stock is significantly higher than $50, then, at that point, the investor can profit from practicing the conversion option. This feature is like a call option on stocks or different securities in that the conversion option has a specific price level that can act like a trigger price. The price level at which it begins to seem OK to change over is anything equivalent to or over the conversion parity price.
Conversion parity price can be seen as the base price that the investor is searching for while thinking about practicing the conversion option in a convertible security. Basically, while the responsible company's stock price is equivalent to or greater than the conversion parity price, an investor ought to consider changing over. Convertible securities are frequently callable, so the issuer can force the hand of investors in this.
Conversion Parity Price and Bond Interest
Convertible bonds are a hybrid security as in they offer bond style payments and a par value, yet in addition can bring about investors profiting from the issuer's stock. Due to this extra opportunity for appreciation, corporations can offer lower overall interest rates on convertible bonds. The conversion parity price on a convertible bond at issue is generally a lot higher than the company's current share price. Thus, the company gets a break on interest and the investor possibly gets a bigger payout in the event that the company performs all around ok that its shares pass the conversion parity price. Of course, the fact that convertible bonds are callable can limit the investor's upside.
Convertible bonds might have upside limitations, however they are better than outright share ownership in downside protection. On the off chance that a convertible security's underlying shares never surpass the conversion parity price, the investor actually gets interest payments on the ordinary bond alongside the initial investment. In addition, even on the off chance that the company bombs outright, the holder of the convertible bond is senior to the common stock shareholders in the last distribution scheme.
Features
- This price is important to the investor on the grounds that until the shares of stock arrive at that price, there is little value in endeavoring to change over the security into shares.
- Companies giving convertible securities will play close consideration regarding this price since it might trigger a conversion request from every investor who holds such securities.
- Conversion parity price is the effective price an investor paid for the opportunity to change over from a company's bond into shares of stock.
