When this happens many convertible holders will not

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Unformatted text preview: its conversion value. When this happens, many convertible holders will not convert, because they already have the market price benefit obtainable from conversion and can still receive fixed periodic interest payments. Because of this behavior, virtually all convertible securities have a call feature that enables the issuer to encourage or “force” conversion. The call price of the security generally exceeds the security’s par value by an amount equal to 1 year’s stated interest on the security. Although the issuer must pay a premium for calling a security, the call privilege is generally not exercised until the conversion value of the security is 10 to 15 percent above the call price. This type of premium above the call price helps to assure the issuer that the holders of the convertible will convert it when the call is made, instead of accepting the call price. Unfortunately, there are instances when the market price of a security does not reach a level sufficient to stimulate the conve...
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This document was uploaded on 01/19/2014.

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