Conversion in Finance
Contents
Deciphering Conversions: A Guide to Financial Derivatives
Understanding Conversions
A conversion signifies the exchange of a convertible asset into another asset, typically at a predetermined price and date. This financial derivative instrument is separate from the underlying security, adding value to the overall security. Dive into the intricacies of conversions and explore their significance in the financial realm.
Exploring Convertible Assets
Convertible bonds and preferred shares are prime examples of assets subject to conversions. Convertible bonds grant bondholders the option to swap the bond for a specified amount of the bond issuer's equity. Meanwhile, preferred shares offer conversion rights, allowing shareholders to convert to common shares if advantageous.
Navigating Conversion Scenarios
Consider scenarios where conversion options come into play. For instance, a bondholder may choose to convert a convertible bond into equity when the share value surpasses a certain threshold, as outlined in the bond's terms. Similarly, preferred shareholders may opt for conversion if common share prices rise above the predetermined conversion price.
Implications of Conversions
Understanding the impact of conversions is crucial. Conversion of securities, particularly preferred shares into common stock, dilutes existing shareholders' ownership. This dilution alters fundamental aspects of stock, including ownership percentage, voting control, earnings per share, and individual share value.