Under what circumstances can a company successfully force conversion of a convertible bond? Under what circumstances will the company fail?
Since holders of convertible bonds generally have no reason ever to convert the bonds to stock, companies often use a call feature to force conversion. Bondholders will convert their bonds in response to a call if the value of the stock to be received upon conversion exceeds the proceeds from the call. This will be the case if the stock has risen sufficiently since the bond was issued. On the other hand, if the company’s stock price has not increased very much so that the value to be received upon conversion is less than the proceeds from the call, bondholders will simply submit to the call and the company will find itself paying out cash instead of issuing new stock.