Listen to a Business English Dialogue About Parity price
Gabriella: Hi Eva, have you ever heard of the term “parity price” in finance?
Eva: Hello Gabriella! Yes, the parity price refers to the price at which two securities or assets are equal in value, often used in the context of convertible securities.
Gabriella: That’s correct. It’s particularly relevant when comparing the price of a convertible security to the price of the underlying common stock, determining the point at which the convertible security is valued the same as the equivalent number of shares of the common stock.
Eva: Exactly. Parity price helps investors assess the attractiveness of a convertible security by comparing its current market price to the value it would have if converted into common stock at the prevailing conversion ratio.
Gabriella: Right. If the market price of the convertible security falls below its parity price, it may indicate that the security is undervalued relative to the underlying stock and could present a buying opportunity for investors.
Eva: Indeed. Conversely, if the market price of the convertible security exceeds its parity price, it may suggest that the security is overvalued compared to the value of the underlying stock, potentially prompting investors to consider selling or avoiding the security.
Gabriella: Absolutely. Understanding parity price is essential for investors who are evaluating convertible securities as part of their investment portfolio, helping them make informed decisions based on the relative value and potential return of these instruments.
Eva: Agreed. By comparing the parity price to the current market price of a convertible security, investors can gauge its attractiveness and assess whether it aligns with their investment objectives and risk tolerance in the dynamic financial markets.