Companies offer executives interest-paying bonds convertible into stock at a very attractive conversion price.
As in the case for all gold standards, setting the gold conversion price at the correct level would be crucial.
Evidently Dennis Hayes had so much confidence in his company that he figured the stock would zoom upwards, taking the conversion price up with it.
Most convertible securities allow the buyer to convert into common stock at a fixed conversion price set at a modest premium to wherever the common is trading at the time the convertible security is issued.
Because under the terms of its government bailout, RBS has the right to sell new shares to the government at 50p per share, or roughly twice the current price (in technical terms, 50p is the conversion price of RBS's 'B' shares).
Figure on spending a multiple of the purchase price for the conversion.
That happens as the issue reaches its maturity date or once the conversion value exceeds its call price, since it can then be called anytime.
If the common closes on the conversion date at the recent price, the common buyer's total return would be 9%, while the convert buyer would have 10.8%.
Because people wrongly view preferreds as less safe than bonds, the preferreds tend to have better yields and lower conversion premiums. (The conversion premium is the amount by which the price of a convertible exceeds the value of the common stock you would get if you converted.) Another plus: They are exchange traded, so preferreds are more liquid.
The high price undoes the main selling point of REIT conversion, which is that dividends will get bigger now that the corporate tax burden is eliminated.
FORBES: The U.K. has joined the REIT revolution. Buy sparingly.
Conversion, should he ever contemplate it, may have a price.
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