Conversion prices determine the structure of prices for convertible securities, such as preferred shares or bonds, and are established at the time of issuance. The conversion price helps determine the number of shares received and is typically set higher than the current market price, anticipating future stock splits or increases in value.
Conversion prices have to do with the structure of prices associated with 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 can be converted to common shares when a specific set of circumstances occurs.
As part of the overall purchase structure of the security, the conversion price is established at the time of issuance. The exact details of the conversion price will appear in one of two different documents, depending on the type of security involved. With the preferred participation of shares, 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 surety agreement. In most countries, there are no provisions for adding a conversion price clause to bond or stock issue shares after the fact.
Within the general structure of the initial purchase, the conversion price helps to establish several perimeters that come into play. Often the conversion price will play a role in deciding how many shares can be received as part of the purchase. This is usually accomplished by taking the principal value of the security and dividing that figure by the conversion price under consideration.
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 it is anticipated that stock splits may be on offer in a short period of time. A conversion pricing scheme may also be established when the stock is projected to increase significantly in value within a reasonable period of time. In both scenarios, the higher purchase price paid by the investor at the time of acquisition is offset by the high returns that are earned at a later date.
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