Conversion

Posted in Finance, Accounting and Economics Terms, Total Reads: 305
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Definition: Conversion

Conversion can be explained as the right to transform one type of investment to another like bond to stock conversion or mutual fund switching. In general, conversion takes place at a pre determined price or date.


Advantages:

• This feature adds value to the investment

• Has a lesser risk possibility in the future


There are different types of conversions:

a. Mutual Fund: it is also called a Conversion Privilege where a mutual fund investor can shift money from one portfolio to another of the same mutual fund without incurring additional charges


b. Convertible Bond: his is a type of bond that the bond holder can convert into a specific number of shares of stock in the same company or to equal amount of cash at the date of maturity. For example, Ian owns a convertible bond worth Rs. 5000 in GE. At the date of maturity, there is an option to convert this bond into 50 shares of the same company. Ian would exercise his option only if GE’s share price exceeds Rs. 100. This can be considered as converting from creditor to an owner

 

Example of a convertible bond certificate


c. Mortgage: An adjustable- rate mortgage can be converted to a fixed- rate mortgage. Adjustable rate mortgage has interest rates which might increase or decrease based on an index which shows the remaining loan and a benchmark. This can be converted to a fixed rate mortgage to reduce risk of interest rate increase

 

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