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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