Series 6: 4.1.2.4.3. Convertible Preferred Stock

4.1.2.4.3. Convertible Preferred Stock

Like participating preferred stock, 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.

Since convertible preferred stock can be converted to common stock, its secondary market price is more dependent on the price of the company’s common stock than on changes in interest rates. In fact, the market price of a company’s convertible preferred stock typically moves up or down with the price of the company’s common stock.

The parity value of convertible preferred stock is also an important concept that may be tested on the exam. Parity value is the price at which a share of convertible preferred stock is trading if the total value of common stock shares resulting from a conversion is equal to the market value of the convertible preferred stock. Parity value may also be called parity price.

Example: One share of XYZ convertible preferred stock converts to 10 shares of the company’s common stock. If the company’s common stock is trading at $20, the parity value of XYZ convertible preferred is $200 (10