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What is a Conversion Price?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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    2003-2016
    Conjecture Corporation
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Conversion prices have to do with the structure of the pricing related to various types of convertible securities. The convertible security in question may be preferred shares of stock or bonds issued by a given company. As part of the conversion price approach, these types of securities may be converted into common stock when a specified set of circumstances takes place.

As part of the overall purchase structure for the security, the conversion price is set at the time of issue. The exact details of the conversion price will appear in one of two different documents, depending on the type of security involved. With preferred share of stock, the information will be found in the body of the security prospectus. If the security in question is a convertible bond issue, the details will be included in the bond indenture. In most countries, there are no provisions for adding a conversion price clause to shares of stock or bond issues after the fact.

Within the overall structure of the initial purchase, the conversion price helps to set several perimeters that come into play. Often, the conversion price will play a role in deciding how many shares may be received as part of the purchase. This is usually accomplished by taking the principle value of the security and dividing that figure by the conversion price under consideration.

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In general, the conversion price is set at a rate per share that is higher than the current unit price on the open market. Part of the reason for this has to do with the fact that the conversion price is often employed when there is an anticipation that stock splits may be in the offering in a short period of time. A conversion price scheme may also be set into place when the stock is projected to significantly increase in value within a reasonable period of time. In both scenarios, the higher purchase price that the investor pays at the time of acquisition is offset by the high returns that are realized at a later date.

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