BROWSE

Parity Price

What is a 'Parity Price'

A parity price is when the price of an asset is directly linked to the price of another asset. The parity price concept is used for both securities and commodities, and the term explains when two assets have an equal value. Convertibles, such as convertible bonds, use the parity price concept to determine when it is financially beneficial to convert a bond into shares of common stock.

How Convertible Bonds Work

A convertible bond offers the opportunity to convert into a fixed number of shares of common stock at a specific price per share. Investors purchase convertible bonds because the owner can earn interest on a fixed-income investment and has the option of converting into the company’s equity. Parity price is the market price of the convertible security divided by the conversion ratio (the number of common stock shares received upon conversion).

Factoring in Commodities

For agricultural commodities, the parity price is the purchasing power of a particular commodity relative to a farmer's expenses, such as wages, loan interest and equipment. The Agricultural Adjustment Act of 1938 states that the parity price is the average price received by farmers for agricultural commodities during the previous 10 years, and if the parity price for a commodity is below the current market price, the government may provide price support through direct purchases.

Examples of Stock Options

When an investor purchases a stock option, the owner has the right to buy a fixed number of stock shares at a stated price, and the right to buy the shares expires on a fixed date. One $50 Microsoft call option, for example, means that the owner can buy 100 shares of Microsoft common stock at $50 per share before the option expires. If the market price of Microsoft is $60 per share, the intrinsic value of the option is ($60 - $50), or $10 per share. If the price of the stock option is also $10, the option trade is at parity.

Explaining 'Parity Price'

Parity Price FAQ

What is a parity price?

Parity price is when you compare two assets with the same value. Parity prices have different contexts depending on the type of asset. For example, it is the price at which investors can make profits when they convert their bonds into shares of common stock.

How do you calculate parity price?

Parity price is calculated by dividing the market price of the convertible security with the conversion ratio (the number of common stock shares received upon conversion).

What is the conversion price of a convertible bond?

The conversion price of the convertible security is derived by dividing the price of the bond with the conversion ratio. The conversion price of a bond par value of $1000 is calculated by dividing $1000 by 5, which is $200.

What happens when a convertible bond is called?

A convertible bond pays fixed-income interest, but can be converted into a predetermined number of common stock shares. Converting the bond to stock occurs at specific times during the bond's life and is often decided by the bondholder.

What is a conversion premium?

A conversion premium is the difference between the price of a convertible security and the current market value of the common stock, which it can be converted into.

What is trading at parity?

Parity price can determine stock options value, as parity is the price an option trades at its intrinsic value. Parity is also used to compare the value of two currencies.

When should you convert a convertible bond?

A disadvantage of convertible bonds is that the issuing company has power to call the bonds. It means the company can forcibly convert them. Forced conversion usually occurs when the stock price is higher than what it would be if the bond were redeemed.

Further Reading


Purchasing power parity, price indices, and exchange rate forcasts
www.sciencedirect.com [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

The economics of import parity pricing: A pedagogical noteThe economics of import parity pricing: A pedagogical note
onlinelibrary.wiley.com [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

Real exchange rates and purchasing power parity: mean-reversion in economic thoughtReal exchange rates and purchasing power parity: mean-reversion in economic thought
www.tandfonline.com [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

National price levels, purchasing power parity, and cointegration: a test of four high inflation economiesNational price levels, purchasing power parity, and cointegration: a test of four high inflation economies
www.sciencedirect.com [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

The Development of the Parity Price Formula for Agriculture, 1919-1923The Development of the Parity Price Formula for Agriculture, 1919-1923
www.jstor.org [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

Put-call parity and market efficiencyPut-call parity and market efficiency
www.jstor.org [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

The purchasing power parity puzzleThe purchasing power parity puzzle
www.jstor.org [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

Threshold cointegration and purchasing power parity in the pacific nationsThreshold cointegration and purchasing power parity in the pacific nations
www.tandfonline.com [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

Purchasing power parity in economies in transition: evidence from Central and East European countriesPurchasing power parity in economies in transition: evidence from Central and East European countries
www.tandfonline.com [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …

Potential pitfalls for the purchasing‐power‐parity puzzle? Sampling and specification biases in mean‐reversion tests of the law of one pricePotential pitfalls for the purchasing‐power‐parity puzzle? Sampling and specification biases in mean‐reversion tests of the law of one price
onlinelibrary.wiley.com [PDF]
… from absolute Big Mac parity were removed, convergence to relative Big Mac parity was quite … poorly under both systems and that foreign prices rather than US prices seemed to … the bilateral nominal exchange rates and the indices of wholesale price, consumer price, and traded …



FAQ


What is a parity price?

Parity price is when you compare two assets with the same value. Parity prices have different contexts depending on the type of asset. For example, it is the price at which investors can make profits when they convert their bonds into shares of common stock.

How do you calculate parity price?

Parity price is calculated by dividing the market price of the convertible security with the conversion ratio (the number of common stock shares received upon conversion).

What is the conversion price of a convertible bond?

The conversion price of the convertible security is derived by dividing the price of the bond with the conversion ratio. The conversion price of a bond par value of $1000 is calculated by dividing $1000 by 5, which is $200.

What happens when a convertible bond is called?

A convertible bond pays fixed-income interest, but can be converted into a predetermined number of common stock shares. Converting the bond to stock occurs at specific times during the bond's life and is often decided by the bondholder.

What is a conversion premium?

A conversion premium is the difference between the price of a convertible security and the current market value of the common stock, which it can be converted into.

What is trading at parity?

Parity price can determine stock options value, as parity is the price an option trades at its intrinsic value. Parity is also used to compare the value of two currencies.

When should you convert a convertible bond?

A disadvantage of convertible bonds is that the issuing company has power to call the bonds. It means the company can forcibly convert them. Forced conversion usually occurs when the stock price is higher than what it would be if the bond were redeemed.

Leave a Reply

Your email address will not be published. Required fields are marked *