In mortgage finance, the term conversion option denotes a clause in a variable mortgage agreement which allows the borrower to convert the variable mortgage into a fixed rate mortgage. Conversion options may be open, allowing conversion at any time, or they may limit conversion opportunities to specific intervals.
The term conversion option is also used to denote a clause included in convertible bond agreements which entitles the holder of the bond to exchange it for shares in the issuing company if they so choose. This provision may also be included in shares, in which case the conversion option entitles the holder of one category of shares to exchange those shares for a different category of shares. For example, preferred shares may have a conversion option which entitles their holder to convert them into common shares or vice versa.
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