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Chapter 5: Q6DQ (page 622)

What is meant by a step-up in the conversion price?

Short Answer

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Answer

In convertible securities, step-ups causes a scheduled increments in the conversion price of the security.

Step by step solution

01

Introduction to conversion price

The price per share at which a convertible security, like preferred shares or corporate bonds, can be converted into common stock is conversion price.

02

Step-up in the conversion price

A step-up in conversion price will increment with the progression of time and likewise the conversion ratio will fall. Before each step-up, there is an incitement for bondholders to convert to common at the more desirable price.

For instance, if a shareholder owns convertible preferred stock at a conversion price of $20 per share, a step-up may involve an increase in the conversion price to $22 per share.

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