Listen to a Business English Dialogue About Conversion parity
Harper: Hi Lawrence, have you heard about conversion parity? I’ve come across the term, but I’m not entirely sure what it means.
Lawrence: Hey Harper, yes, conversion parity refers to a situation where the market price of a convertible security is equal to the value of the common stock that would be obtained upon conversion. It’s an important concept for investors considering convertible securities.
Harper: Oh, I see. How is conversion parity determined?
Lawrence: Conversion parity is determined by comparing the current market price of the convertible security with the theoretical value of the underlying common stock if the security were to be converted. When the market price equals or exceeds this theoretical value, conversion parity is achieved.
Harper: That’s interesting. What factors can affect conversion parity?
Lawrence: Several factors can affect conversion parity, including the market price of the underlying common stock, interest rates, dividends, and the time remaining until the convertible security matures or is callable. Changes in any of these factors can influence whether conversion parity is reached.
Harper: Got it. Are there any risks associated with investing in convertible securities when conversion parity is not achieved?
Lawrence: Yes, if conversion parity is not achieved, investors may not receive the full value of the underlying common stock upon conversion, leading to potential losses. Additionally, if the market price of the convertible security falls below the conversion price, investors may face dilution of their ownership stake in the company.
Harper: Thanks for explaining, Lawrence. It’s helpful to understand how conversion parity affects the value of convertible securities.
Lawrence: You’re welcome, Harper. Conversion parity is an important concept for investors to consider when evaluating the attractiveness of convertible securities as an investment option. If you have any more questions, feel free to ask!