forced conversion

Forced Conversion

The occurrence of an issuer of a convertible security exercising the right to call the issue, forcing investors to convert their securities into the predetermined number of shares.

Notes:

An issuer will be interested in forcing a conversion if interest rates decline significantly, or if the price of the security underlying the convertible is above the conversion price. Forced conversions are generally detrimental to the holders of the security.

See also: Bond, Conversion, Convertible Bond, Convertible Debenture, Convertible Preferred Stock, Mandatory Convertible, Warrant

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Forced conversion

Occurs when a convertible security is called in by the issuer, usually when the underlying stock is selling well above the conversion price. The issuer thus assures the bonds will be retired without requiring any cash payment. Upon conversion into common, the carrying value of the bonds becomes part of a corporation's equity, thus strengthening the balance sheet and enhancing future debt capability.

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forced conversion

The call for redemption of a convertible security at a price lower than the market value of the underlying asset into which the convertible may be exchanged. The investor finds it more favorable to exchange the convertible for the underlying asset than to give up the security for cash at the call price. For instance, suppose a $1,000 principal bond with a call price of $1,080 is converted into 20 shares of stock selling at $70 each. The bond is worth $1,400 in underlying stock. If the issuer calls the bond, the investor will be forced to convert before the call becomes effective.