Series 6: Convertible Preferred Stock

Convertible Preferred Stock

Like participating, convertible preferred stock allows shareholders to participate in the growth of a company. These investors have the right to convert their preferred shares to common stock at a set conversion ratio. This exchange may occur any time at the investor’s sole discretion. If a $25 certificate may be traded for five shares of common stock (or for $5 per share) and the common stock rises to $10, the price for the preferred stock in the secondary market will rise to around $50 ($10 x 5 shares). The preferred shareholder has the option to sell the certificate or convert the issue and receive five shares of stock. Because convertible preferred stock can be converted to common stock, its price is more dependent on the price of the company’s common stock than on changes in interest rates.

The following two equations will be helpful for the exam:

These equations will also help you with the sample question that follows.

Sample Question

A $100 convertible preferred stock certifi