A convertible security that may be exchanged for another convertible security. For example, a bond may be exchanged for convertible preferred stock, which then may be exchanged for common stock. An indirect convertible is priced according to the price of the second underlying security. That is, the price of the bond from the example fluctuates according to the price of the common stock, rather than the price of the preferred stock.
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A convertible security that may be exchanged into another convertible. The market price of the indirect convertible is actually a function of the value of the shares underlying the second convertible. As an example, a bond may be convertible into 10 shares of a convertible preferred stock, each of which may be exchanged for 5 shares of common stock. Thus, the bond trades indirectly on the basis of the value of 50 shares of common stock.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.