Principles of Managerial Finance, 15th Edition

17.3 Convertible Securities

1. LG3

2. LG4

A conversion feature is an option that is included as part of a bond or a preferred stock issue and allows its holder to change the security into a stated number of shares of common stock. The conversion feature typically enhances the marketability of an issue.

Types of Convertible Securities

Corporate bonds and preferred stocks may be convertible into common stock. The most common type of convertible security is the bond. Convertibles normally have an accompanying call feature, which permits the issuer to retire or encourage conversion of outstanding convertibles when appropriate.

Convertible Bonds

A convertible bond can be changed into a specified number of shares of common stock. Firms nearly always ...