Forced Conversion is the calling in of convertible bonds at a price that is less than the market value of the underlying common stock into which the bonds may be converted
A corporation may try to force the conversion of its outstanding convertible bonds by announcing a call at a price that values the bonds at a price that is lower than the value of the stock to which the bonds can be converted. If for example the bonds were convertible into 40 shares of XYZ common stock and XYZ is trading at $30, the value of the stock is $1,200. If XYZ calls in the bonds at $1,100 under a call feature, the bondholders would be forced to convert the bonds into common stock to realize the most value. The corporation would issue more shares, current stockholders would be diluted and the debt on the corporation’s balance sheet would be eliminated.
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