Series 7 practice questionhardEquity Securities — Preferred Stock — Convertible Parity
A convertible preferred stock has a par value of $100 and is convertible into 4 shares of common stock. If the common stock is trading at $28, what is the parity price of the preferred stock?
- A$112✓ Correct answer
- B$100
- C$140
- D$25
Explanation
Why A — $112
Parity price is calculated by multiplying the conversion ratio by the current market price of the common stock. With a conversion ratio of 4 shares and a common stock price of $28, the parity price is 4 x $28 = $112. If the preferred stock trades below $112, an arbitrage opportunity may exist (buy the preferred, convert, and sell the common).
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