Definition of Convertible Preferred Stock

Convertible Preferred Stock is a preferred stock, which may be converted or exchanged for common shares of the corporation at a predetermined price.

Applying "Convertible Preferred Stock" to Securities Exams:

A corporation may elect to issue a convertible preferred stock to make the preferred issue more attractive to investors. Investors would be willing to accept a lower yielding preferred stock that is convertible into the underlying common stock. By being able to issue the convertible preferred at a lower yield the corporation will save a significant amount in dividends each year. The conversion rate or the number of shares that an investor would be able to receive up conversion is found by using the following formula: par value / conversion price.

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