You have to be able to calculate Parity of convertibles on your Series 7 Exam!

Added: 2026-06-03

[00:00:00]Convertible bonds are very decimal in the 7. You've got to be able to calculate parity.

[00:00:04]All right, so a corporation says, "Listen, why don't you lend us some money?

[00:00:09]Uh I'll make it a 10-year convertible, Brian.

[00:00:12]Go ahead and say at at the end of 10 years, Brian, I'm going to offer you your $1,000 back or I'm going to offer you X number of shares."

[00:00:22]So, you know, if I say to the conversion price is uh 50.

[00:00:27]So, if the conversion price is 50, Josh, that's based on par.

[00:00:32]So, that means in 10 years I'm going to say, "Josh, do you want your $1,000 back or do you want 20 shares of our common?"

[00:00:39]Pretty easy I can make the decision. You just got to take 20 shares times the current market value. If that's more than a thousand, you're going to say, "I'll take my money."

[00:00:47]Now, parity means equal.

[00:00:49]That's what parity means, right? Equal.

[00:00:51]When we say there's a lot of parity in the NFL or NBA or uh MLB, that means that all the teams are the same.

[00:01:01]All right? And parity means what would I be paying for the stock if I buy the bond or if I buy the stock, what is the bond worth? And you're going to have to do a parity calculation or two.

[00:01:11]And so, uh Brian's got his board there.

[00:01:13]Whoop, I what happened? I got to get rid of Brian.

[00:01:15]>> Yeah, I'm just visualizing what your you're saying. Here we go.

[00:01:19]>> [clears throat] >> So, there's the bond. There's the stock, conversion price of 50 bucks. Usually and and Dean's is absolutely right.

[00:01:25]First thing you have to do is learn parity. What is equal value?

[00:01:29]>> [clears throat] >> Cuz if you think about it, both of these securities are trading in their own markets, the bond market or the stock market, right? So, their prices constantly fluctuate. However, since they are tied to one another, if the market value of one goes up, generally the market price will of the other one will go up as well and we're hoping they are equal in value. Now, there's a couple of ways mathematically you can do it. Dean was just describing you have to take the number of shares, right? [snorts] 1,000 / 50 is 20 shares and then multiply it by the market price and see if it equals the market price of the bond. I have a slightly easier way.

[00:02:08]I don't know if this is the format to to show that, but that's essentially what it is. If the market price of the bond goes up, generally the stock price will go up, but what we want to know is if those two prices are equal.

[00:02:23]And that's what we call parity. By the way, Josh, put that in the channel search bar and you can watch me do 20 different questions.

[00:02:30]There's a tutoring replay with convertibles. So, put that in the channel search bar.

[00:02:34]>> I do it on my video. It's in my I >> There you go. Parity, the way to answer you're having issues, I would say practice, drill, and rehearse. I think there's actually a tutoring replay where we just empty the Kaplan QBank of its convertible questions. We do all of them. So, I would say the way you address convertibles is by practice, drilling, and rehearsing. So, you're not fumbling around at some point when you get a convertible. So, I would say I can't imagine any drawing your Series 7, Josh, where you're not going to have to calculate parity at least once.

[00:03:05]Maybe twice. So, it's a point that's in play. We know it's there. We should be able to get it. So, I like that you already have seen that you would need help on this. We can offer you the help.

[00:03:15]Check out those videos. If that doesn't work for you, Josh, you have my permission to join me for my office hour. Just go to deantiny tutoring.

[00:03:23]setmore.com. Go to the class tab and I you're welcome join me for where I usually for paid students, but I'll let you in. And just remind me where you come from and I'll I'll get a whiteboard like Brian's and we can do a couple examples of it.