6th Dec 2009 by Amelia Timbers
Convertible securities are either stock or bonds that can be exchanged for common stock or preferred stock. For example, a convertible bond is debt sold by a firm that, under prescribed conditions, can be exchanged for shares of common or preferred stock. Similarly, convertible stock is preferred stock that can be converted to common stock. There are an array of circumstances in which it would be ideal to exercise a conversion. For example, if the value of the stock drastically increases above the value of the bond, it may be ideal for a convertible bond holder to convert, and get the higher (and riskier) value of the stock instead of the safer, but limited value of the bond. In most cases, firms put specific restrictions on when securities can be converted that could limit their value.
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