Conversion price

Definition

Conversion price is the predetermined price at which a convertible security, such as bonds or preferred stock, can be converted into common stock. It plays a crucial role in determining the value and attractiveness of converting securities to equity.

5 Must Know Facts For Your Next Test

1. The conversion price is set at the time of issuance of the convertible security.
2. It affects how many shares of common stock an investor will receive upon conversion.
3. A lower conversion price generally makes the convertible security more attractive to investors.
4. The conversion price does not change regardless of market fluctuations in the underlying common stock.
5. Companies use convertible securities with a specific conversion price to attract investors while delaying dilution of equity.

Review Questions

• What is the significance of the conversion price in convertible securities?
• How does a lower conversion price impact investor interest?
• Does the conversion price change with market fluctuations?

Related terms

Convertible Bond: A type of bond that can be converted into a predetermined number of shares of common stock.

Dilution:

The reduction in existing shareholders' ownership percentage due to the issuance of new shares.

Equity Financing:

Raising capital through the sale of shares in a company.