If-Converted Method (Securities) - Explained
What is the If-Converted Method of valuing Convertible Securities?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is the If-Converted Method of Valuing Securities?
A security that can be changed to another security is a convertible security, preferred stocks and bonds are the most common examples of convertible securities. The If-Converted Method is used in estimating the value of new shares that convertible securities are changed into.
This means the changes in the amount of outstanding shares when a convertible security is changed to shares are calculated using the if-converted method. In most cases, if the conversion of convertible securities is done when the stock price is more than the exercise price, the if-converted method becomes more essential.
How does the If-Converted Method of Valuing Securities Work?
Preferred shares or bonds have one intrinsic nature and this is their ability to be converted into new shares, which is why they are the common forms of convertible securities. Convertible securities are more appealing to investors than many other forms of securities, this is owing to the fact that the direction of the market grants more flexibility and profit to investors.
Bond issuers often offer convertible securities with the agreement that the number of shares that an investor is entitled to during the conversion would be determined by the security's conversion ratio. The bond issuer can determine the conversion rate, this can be fixed or can change depending on the direction of the market.