Convertible Securities
Chapters in this video
- 0:00 What a convertible security is and why it matters
- 0:58 The investor-option rule: who holds the power
- 2:15 Conversion ratio formula and active recall drill
- 3:17 Parity calculation and when to convert
- 4:24 The complete convertible lifecycle and yield trade-off
- 5:41 Exam trap: lower yields, not higher
- 6:22 Rapid-fire exam recap
What this video covers
- What convertible securities are: preferred stock or bonds exchangeable for common shares at the investor's option, not the company's
- How to calculate the conversion ratio using par value divided by conversion price, and why this formula is the most tested calculation in the unit
- How to calculate parity by dividing the convertible's market price by the conversion ratio, and why parity is the break-even conversion point
- When conversion becomes profitable: only when the common stock price rises above parity, and what the investor does when the stock price stays below parity
- Why convertible securities carry lower yields than non-convertible equivalents, and how the investor pays for the conversion privilege through reduced income
- The split personality of convertibles: fixed-income floor protection when the stock price is low, unlimited equity upside when the stock price climbs above parity
Read the full lesson, free
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