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11. Introduction to Advanced Topics > The Strange New World of Conversion

The Strange New World of Conversion

Once upon a time, the result of converting your bonds was simple. You got all the stock your bonds controlled. Now, it’s often less straightforward—although the result is actually beneficial for you, as a nontraditional investor, in most cases.

Here’s why. First of all, convertible issuers now jump through a variety of hoops to minimize the dilution they have to report. In other words, they want to make earnings per share look as good as possible, even if it takes some accounting tricks. By using a technique called net share settlement, upon conversion, issuers now often deliver the first 100 of value in cash, and only the excess in stock. So if a convertible is worth 140, the issuer typically gives you 100 in cash and shares worth 40, instead of stock worth 140. This actually leaves you less vulnerable to a precipitous drop in the stock, assuming you intend to sell the shares you get after you convert.


  

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