Abstract:
Systems and methods for offering and servicing financial instruments ( 101 ) creates a way for issuers to offer financial instruments ( 101 ) that are accretive to earnings regardless of the Price/Earnings ratio. Specifically, the present invention provides systems and methods for offering and servicing convertible or exchangeable contingent conversion financial instruments.

Description:
CROSS REFERENCE TO RELATED APPLICATION  
       [0001]     This claims the benefit of U.S. Provisional Patent Application No. 60/311,516, filed Aug. 10, 2001, which is hereby incorporated by reference in its entirety. 
     
    
     BACKGROUND OF THE INVENTION  
       [0002]     This invention relates to convertible and exchangeable financial instruments (e.g., debt instruments, preferred instruments, trust preferred instruments, warrants, certain insurance contracts, and suitable derivatives thereof, or any security backed by any of the above) and methods and systems for offering and servicing the same.  
         [0003]     A convertible instrument, which may be converted into something of value (e.g., common stock), may be referenced throughout this application. The scope of this invention also includes exchangeable instruments which may be exchanged for something of value. As used herein and in the claims that follow, all references to a convertible instrument, or to conversion apply equally to an exchangeable instrument, or exchange, respectively.  
         [0004]     A common financial instrument, for example, is a convertible bond which can be converted by holders into a fixed or formula amount of shares. At issuance, the value of the bond is typically greater than the value of the fixed shares that the bond is convertible into. For example, a bond may be issued for $1,000 with a right to convert into ten shares of the issuer&#39;s common stock, at a time when the current market value per share is $83. ordinarily, under these terms, the stock must appreciate to at least $100 per share before it would be economically rational for the holder to exercise its right to convert the bond. A convertible bond of this kind is described as having a roughly 20 percent conversion premium, because the stock must appreciate about 20 percent (i.e. $17) before conversion would be economically advantageous.  
         [0005]     Because the conversion right provides an investor with a possible appreciation in value that the fixed rate debt of the issuer does not provide, the interest rate on convertible instruments may be lower than the interest rate on fixed rate instruments. Economically, the conversion right is an option to acquire issuer stock, and the lower rate of interest compensates the issuer for providing this option.  
         [0006]     Convertible instruments generally also provide that the issuer may optionally redeem the instrument prior to its stated maturity, subject to the holder&#39;s conversion rights. If at the time of the optional redemption the value of the stock has risen above the value of the debt, the holder generally will exercise its conversion right so that it receives the stock rather than the optional redemption amount.  
         [0007]     Issuing a convertible financial instrument often proves to have an unfavorable effect on a corporation&#39;s Earnings Per Share (“EPS”). It would be desirable to provide financial instruments, and methods and systems for offering and servicing such financial instruments, that provide issuers with a financing that is not initially disadvantageous in the calculations used to derive earnings per share.  
       SUMMARY OF THE INVENTION  
       [0008]     It is an object of this invention to provide financial instruments, and methods and systems for offering and servicing such financial instruments, that are contingently convertible. In some embodiments, these convertible financial instruments may include zero coupon notes (e.g., long-term zero coupon notes (including Liquid Yield Option™ Notes (“LYONs™”)), cash pay or partial cash pay bonds, debt instruments, floating rate debt instruments, preferred instruments, trust preferred instruments, warrants, certain insurance contracts, suitable derivatives thereof, or any security backed by any of the above). Also, some embodiments may allow the number of underlying instruments issuable or deliverable at conversion or exchange to be variable or adjusted under certain circumstances (e.g., merger, acquisition, or formulae amounts). 
     
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
       [0009]     The above and other objects and advantages of the invention will be apparent upon consideration of the following detailed description, taken in conjunction with the accompanying drawings, in which like reference characters refer to like parts throughout, and in which:  
         [0010]      FIGS. 1-4  are flowcharts of illustrative steps involved in issuing and servicing contingently convertible financial instruments in accordance with some embodiments of the present invention;  
         [0011]      FIG. 5  presents the illustrative information flow for issuing and servicing financial instruments, in accordance with some embodiments of the present invention;  
         [0012]      FIG. 6  is illustrative of an exemplary system for implementing the method in accordance with some embodiments of the present invention;  
         [0013]      FIG. 7  is a cross-sectional view of a magnetic data storage medium encoded with a set of machine-executable instructions for performing the method in accordance with the present invention; and  
         [0014]      FIG. 8  is a cross-sectional view of an optically readable data storage medium encoded with a set of machine executable instructions for performing the method in accordance with the present invention. 
     
    
     DETAILED DESCRIPTION OF THE INVENTION  
       [0015]     The present invention is a contingently convertible or exchangeable financial instrument, and systems and methods for offering and servicing the same. In accordance with some embodiments, the instruments may be based on, for example, short or long-term (20-30 year) zero coupon instruments (e.g., long-term zero coupon notes (including Liquid Yield Option™ Notes (“LYONs™”))), cash pay or partial cash pay convertible bonds, debt instruments, preferred instruments, trust preferred instruments, warrants, certain insurance contracts, suitable derivatives thereof, or any securities backed by any of the above. The issuer of a contingently convertible instrument may be, for example, a publicly-traded, widely-held company sometimes referred to herein as the issuer of the instrument. The issuer of the financial instrument may allow contingent conversion of the instrument in certain circumstances or under certain formulae calculations.  
         [0016]     For example: 
        1. when the closing sale price of the shares for at least a pre-determined number of trading days prior to the day of exercise is greater than a pre-determined percentage, for example, lower than or greater than 100%, of the conversion price, for example, per common share or such preceding trading day;     2. upon the occurrence of the value of the financial instrument falling below the initial value.     3. when such instruments have been called for redemption;     4. upon the occurrence of certain corporate transactions (e.g., significant distributions to shareholders, mergers, consolidation, etc.);     5. during any period in which the credit rating of the instrument is below a specified level;     6. when the financial instrument is trading at less than, equal to, or greater than a pre-determined value or formulae amounts; or     7. other formulae based on the value of the financial instrument, another financial security, or an index amount of a reference security, or a pool of securities or indices, or both.        
 
         [0024]     The conversion price per common share on a given day may, for example, equal the quotient of the sum of the issue price of the instrument plus any accrued original issue discount for such instrument, divided by the number of shares issuable upon conversion of the instrument on that day.  
         [0025]     The number of shares issuable upon conversion of an instrument, in accordance with this invention, may vary by design or be adjusted for certain reasons, such as stock splits, stock dividends, mergers, or consolidation. In some embodiments, the number of shares may not be adjusted for accrued original issue discount.  
       EXAMPLE 1  
     Calculation of Contingent Conversion Trigger Prices (Part 1/7)  
       [0026]    
       
         
               
               
               
               
             
               
               
             
               
               
               
               
               
               
               
             
           
               
                   
               
               
                   
               
             
             
               
                 Assumptions: 
                   
                   
                   
               
               
                 Stock Price @ Issue 
                 $100.00 
                 Yield 
                    2.00% 
               
               
                 Initial Conversion 
                 30% 
                 Face Value at Maturity 
                 $1,000.00 
               
               
                 Premium 
               
               
                 Initial Conversion Price 
                 $130.00 
                 Issue Price 
                   $671.65 
               
               
                 Conversion Ratio 
                 5.166500000 
                 True Yield 
                    1.00% 
               
               
                   
                   
                 (Semi-Annual) 
               
               
                 Issue Date 
                 Aug. 13, 2001 
                 Initial Trigger 
                 120.00000% 
               
               
                   
                   
                 Decline 
                  0.12660% 
               
               
                   
               
             
          
           
               
                   
                 Bond Conversion 
               
             
          
           
               
                   
                 Semi-Annual 
                   
                   
                   
                   
                   
               
               
                   
                 Bond 
               
               
                   
                 Accreted 
                   
                 Accreted 
                   
                   
                 Trigger 
               
               
                 Date 
                 Value 
                 Year Fraction 
                 Value 
                 Price 
                 Trigger % 
                 Price 
               
               
                   
               
               
                 Issue Date 
               
               
                 Aug. 13, 2001 
                 $671.65 
               
               
                 Nov. 1, 2001 
                   
                 0.21666666667 
                 674.56 
                 $130.56 
                 120.0000% 
                 $156.68 
               
               
                 Feb. 1, 2002 
                   
                 0.25000000000 
                 677.92 
                 $131.21 
                 119.8734% 
                 $157.29 
               
               
                 Feb. 13, 2002 
                 $678.37 
               
               
                 May 1, 2002 
                   
                 0.21666666667 
                 681.31 
                 $131.87 
                 119.7468% 
                 $157.91 
               
               
                 Aug. 1, 2002 
                   
                 0.25000000000 
                 684.70 
                 $132.53 
                 119.6202% 
                 $158.53 
               
               
                 Aug. 13, 2002 
                 $685.15 
               
               
                 Nov. 1, 2002 
                   
                 0.21666666667 
                 688.12 
                 $133.19 
                 119.4936% 
                 $159.15 
               
               
                 Feb. 1, 2003 
                   
                 0.25000000000 
                 691.55 
                 $133.85 
                 119.3670% 
                 $159.77 
               
               
                 Feb. 13, 2003 
                 $692.00 
               
               
                 May 1, 2003 
                   
                 0.21666666667 
                 695.00 
                 $134.52 
                 119.2404% 
                 $160.40 
               
               
                 Aug. 1, 2003 
                   
                 0.25000000000 
                 698.46 
                 $135.19 
                 119.1138% 
                 $161.03 
               
               
                 Aug. 13, 2003 
                 $698.92 
               
               
                 Nov. 1, 2003 
                   
                 0.21666666667 
                 701.95 
                 $135.87 
                 118.9872% 
                 $161.66 
               
               
                 Feb. 1, 2004 
                   
                 0.25000000000 
                 705.45 
                 $136.54 
                 118.8606% 
                 $162.29 
               
               
                 Feb. 13, 2004 
                 $705.91 
               
               
                 May 1, 2004 
                   
                 0.21666666667 
                 708.97 
                 $137.22 
                 118.7340% 
                 $162.93 
               
               
                 Aug. 1, 2004 
                   
                 0.25000000000 
                 712.50 
                 $137.91 
                 118.6074% 
                 $163.57 
               
               
                 Aug. 13, 2004 
                 $712.97 
               
               
                 Nov. 1, 2004 
                   
                 0.21666666667 
                 716.06 
                 $138.60 
                 118.4808% 
                 $164.21 
               
               
                 Feb. 1, 2005 
                   
                 0.25000000000 
                 719.62 
                 $139.29 
                 118.3542% 
                 $164.85 
               
               
                 Feb. 13, 2005 
                 $720.10 
               
               
                 May 1, 2005 
                   
                 0.21666666667 
                 723.22 
                 $139.98 
                 118.2276% 
                 $165.50 
               
               
                 Aug. 1, 2005 
                   
                 0.25000000000 
                 726.82 
                 $140.68 
                 118.1010% 
                 $166.14 
               
               
                 Aug. 13, 2005 
                 $727.30 
               
               
                 Nov. 1, 2005 
                   
                 0.21666666667 
                 730.45 
                 $141.38 
                 117.9744% 
                 $166.80 
               
               
                 Feb. 1, 2006 
                   
                 0.25000000000 
                 734.09 
                 $142.09 
                 117.8478% 
                 $167.45 
               
               
                 Feb. 13, 2006 
                 $734.57 
               
               
                 May 1, 2006 
                   
                 0.21666666667 
                 737.76 
                 $142.80 
                 117.7212% 
                 $168.10 
               
               
                 Aug. 1, 2006 
                   
                 0.25000000000 
                 741.43 
                 $143.51 
                 117.5946% 
                 $168.76 
               
               
                 Aug. 13, 2006 
                 $741.92 
               
               
                 Nov. 1, 2006 
                   
                 0.21666666667 
                 745.14 
                 $144.22 
                 117.4680% 
                 $169.42 
               
               
                 Feb. 1, 2007 
                   
                 0.25000000000 
                 748.84 
                 $144.94 
                 117.3414% 
                 $170.08 
               
               
                 Feb. 13, 2007 
                 $749.34 
               
               
                 May 1, 2007 
                   
                 0.21666666667 
                 752.59 
                 $145.67 
                 117.2148% 
                 $170.74 
               
               
                 Aug. 1, 2007 
                   
                 0.25000000000 
                 756.33 
                 $146.39 
                 117.0882% 
                 $171.41 
               
               
                 Aug. 13, 2007 
                 $756.83 
               
               
                 Nov. 1, 2007 
                   
                 0.21666666667 
                 760.11 
                 $147.12 
                 116.9616% 
                 $172.08 
               
               
                 Feb. 1, 2008 
                   
                 0.25000000000 
                 763.90 
                 $147.86 
                 116.8350% 
                 $172.75 
               
               
                 Feb. 13, 2008 
                 $764.40 
               
               
                 May 1, 2008 
                   
                 0.21666666667 
                 767.71 
                 $148.59 
                 116.7084% 
                 $173.42 
               
               
                 Aug. 1, 2008 
                   
                 0.25000000000 
                 771.54 
                 $149.33 
                 116.5818% 
                 $174.10 
               
               
                 Aug. 13, 2008 
                 $772.05 
               
               
                 Nov. 1, 2008 
                   
                 0.21666666667 
                 775.39 
                 $150.08 
                 116.4552% 
                 $174.78 
               
               
                 Feb. 1, 2009 
                   
                 0.25000000000 
                 779.25 
                 $150.83 
                 116.3286% 
                 $175.46 
               
               
                 Feb. 13, 2009 
                 $779.77 
               
               
                 May 1, 2009 
                   
                 0.21666666667 
                 783.15 
                 $151.58 
                 116.2020% 
                 $176.14 
               
               
                 Aug. 1, 2009 
                   
                 0.25000000000 
                 787.04 
                 $152.34 
                 116.0754% 
                 $176.82 
               
               
                 Aug. 13, 2009 
                 $787.56 
               
               
                 Nov. 1, 2009 
                   
                 0.21666666667 
                 790.98 
                 $153.10 
                 115.9488% 
                 $177.51 
               
               
                 Feb. 1, 2010 
                   
                 0.25000000000 
                 794.91 
                 $153.86 
                 115.8222% 
                 $178.20 
               
               
                 Feb. 13, 2010 
                 $795.44 
               
               
                 May 1, 2010 
                   
                 0.21666666667 
                 798.89 
                 $154.63 
                 115.6956% 
                 $178.90 
               
               
                 Aug. 1, 2010 
                   
                 0.25000000000 
                 802.86 
                 $155.40 
                 115.5690% 
                 $179.59 
               
               
                 Aug. 13, 2010 
                 $803.39 
               
               
                 Nov. 1, 2010 
                   
                 0.21666666667 
                 806.88 
                 $156.17 
                 115.4424% 
                 $180.29 
               
               
                 Feb. 1, 2011 
                   
                 0.25000000000 
                 810.89 
                 $156.95 
                 115.3158% 
                 $180.99 
               
               
                 Feb. 13, 2011 
                 $811.43 
               
               
                 May 1, 2011 
                   
                 0.21666666667 
                 814.94 
                 $157.74 
                 115.1892% 
                 $181.70 
               
               
                 Aug. 1, 2011 
                   
                 0.25000000000 
                 819.00 
                 $158.52 
                 115.0626% 
                 $182.40 
               
               
                 Aug. 13, 2011 
                 $819.54 
               
               
                 Nov. 1, 2011 
                   
                 0.21666666667 
                 823.09 
                 $159.31 
                 114.9360% 
                 $183.11 
               
               
                 Feb. 1, 2012 
                   
                 0.25000000000 
                 827.19 
                 $160.11 
                 114.8094% 
                 $183.82 
               
               
                 Feb. 13, 2012 
                 $827.74 
               
               
                 May 1, 2012 
                   
                 0.21666666667 
                 831.32 
                 $160.91 
                 114.6828% 
                 $184.53 
               
               
                 Aug. 1, 2012 
                   
                 0.25000000000 
                 835.46 
                 $161.71 
                 114.5562% 
                 $185.25 
               
               
                 Aug. 13, 2012 
                 $836.02 
               
               
                 Nov. 1, 2012 
                   
                 0.21666666667 
                 839.64 
                 $162.52 
                 114.4296% 
                 $185.97 
               
               
                 Feb. 1, 2013 
                   
                 0.25000000000 
                 843.82 
                 $163.32 
                 114.3030% 
                 $186.69 
               
               
                 Feb. 13, 2013 
                 $844.38 
               
               
                 May 1, 2013 
                   
                 0.21666666667 
                 848.03 
                 $164.14 
                 114.1764% 
                 $187.41 
               
               
                 Aug. 1, 2013 
                   
                 0.25000000000 
                 852.26 
                 $164.96 
                 114.0498% 
                 $188.13 
               
               
                 Aug. 13, 2013 
                 $852.82 
               
               
                 Nov. 1, 2013 
                   
                 0.21666666667 
                 856.52 
                 $165.78 
                 113.9232% 
                 $188.86 
               
               
                 Feb. 1, 2014 
                   
                 0.25000000000 
                 860.78 
                 $166.61 
                 113.7966% 
                 $189.59 
               
               
                 Feb. 13, 2014 
                 $861.35 
               
               
                 May 1, 2014 
                   
                 0.21666666667 
                 865.08 
                 $167.44 
                 113.6700% 
                 $190.33 
               
               
                 Aug. 1, 2014 
                   
                 0.25000000000 
                 869.39 
                 $168.27 
                 113.5434% 
                 $191.06 
               
               
                 Aug. 13, 2014 
                 $869.96 
               
               
                 Nov. 1, 2014 
                   
                 0.21666666667 
                 873.73 
                 $169.11 
                 113.4168% 
                 $191.80 
               
               
                 Feb. 1, 2015 
                   
                 0.25000000000 
                 878.08 
                 $169.96 
                 113.2902% 
                 $192.54 
               
               
                 Feb. 13, 2015 
                 $878.66 
               
               
                 May 1, 2015 
                   
                 0.21666666667 
                 882.47 
                 $170.81 
                 113.1636% 
                 $193.29 
               
               
                 Aug. 1, 2015 
                   
                 0.25000000000 
                 886.86 
                 $171.66 
                 113.0370% 
                 $194.04 
               
               
                 Aug. 13, 2015 
                 $887.45 
               
               
                 Nov. 1, 2015 
                   
                 0.21666666667 
                 891.29 
                 $172.51 
                 112.9104% 
                 $194.79 
               
               
                 Feb. 1, 2016 
                   
                 0.25000000000 
                 895.73 
                 $173.37 
                 112.7838% 
                 $195.54 
               
               
                 Feb. 13, 2016 
                 $896.32 
               
               
                 May 1, 2016 
                   
                 0.21666666667 
                 900.21 
                 $174.24 
                 112.6572% 
                 $196.29 
               
               
                 Aug. 1, 2016 
                   
                 0.25000000000 
                 904.69 
                 $175.11 
                 112.5306% 
                 $197.05 
               
               
                 Aug. 13, 2016 
                 $905.29 
               
               
                 Nov. 1, 2016 
                   
                 0.21666666667 
                 909.21 
                 $175.98 
                 112.4040% 
                 $197.81 
               
               
                 Feb. 1, 2017 
                   
                 0.25000000000 
                 913.74 
                 $176.86 
                 112.2774% 
                 $198.57 
               
               
                 Feb. 13, 2017 
                 $914.34 
               
               
                 May 1, 2017 
                   
                 0.21666666667 
                 918.30 
                 $177.74 
                 112.1508% 
                 $199.34 
               
               
                 Aug. 1, 2017 
                   
                 0.25000000000 
                 922.87 
                 $178.63 
                 112.0242% 
                 $200.10 
               
               
                 Aug. 13, 2017 
                 $923.48 
               
               
                 Nov. 1, 2017 
                   
                 0.21666666667 
                 927.48 
                 $179.52 
                 111.8976% 
                 $200.88 
               
               
                 Feb. 1, 2018 
                   
                 0.25000000000 
                 932.10 
                 $180.41 
                 111.7710% 
                 $201.65 
               
               
                 Feb. 13, 2018 
                 $932.72 
               
               
                 May 1, 2018 
                   
                 0.21666666667 
                 936.76 
                 $181.31 
                 111.6444% 
                 $202.43 
               
               
                 Aug. 1, 2018 
                   
                 0.25000000000 
                 941.42 
                 $182.22 
                 111.5178% 
                 $203.20 
               
               
                 Aug. 13, 2018 
                 $942.04 
               
               
                 Nov. 1, 2018 
                   
                 0.21666666667 
                 946.13 
                 $183.13 
                 111.3912% 
                 $203.99 
               
               
                 Feb. 1, 2019 
                   
                 0.25000000000 
                 950.84 
                 $184.04 
                 111.2646% 
                 $204.77 
               
               
                 Feb. 13, 2019 
                 $951.47 
               
               
                 May 1, 2019 
                   
                 0.21666666667 
                 955.59 
                 $184.96 
                 111.1380% 
                 $205.56 
               
               
                 Aug. 1, 2019 
                   
                 0.25000000000 
                 960.35 
                 $185.88 
                 111.0114% 
                 $206.35 
               
               
                 Aug. 13, 2019 
                 $960.98 
               
               
                 Nov. 1, 2019 
                   
                 0.21666666667 
                 965.14 
                 $186.81 
                 110.8848% 
                 $207.14 
               
               
                 Feb. 1, 2020 
                   
                 0.25000000000 
                 969.95 
                 $187.74 
                 110.7582% 
                 $207.94 
               
               
                 Feb. 13, 2020 
                 $970.59 
               
               
                 May 1, 2020 
                   
                 0.21666666667 
                 974.80 
                 $188.68 
                 110.6316% 
                 $208.74 
               
               
                 Aug. 1, 2020 
                   
                 0.25000000000 
                 979.65 
                 $189.62 
                 110.5050% 
                 $209.53 
               
               
                 Aug. 13, 2020 
                 $980.30 
               
               
                 Nov. 1, 2020 
                   
                 0.21666666667 
                 984.54 
                 $190.56 
                 110.3784% 
                 $210.34 
               
               
                 Feb. 1, 2021 
                   
                 0.25000000000 
                 989.45 
                 $191.51 
                 110.2518% 
                 $211.15 
               
               
                 Feb. 13, 2021 
                 $990.10 
               
               
                 May 1, 2021 
                   
                 0.21666666667 
                 994.39 
                 $192.47 
                 110.1252% 
                 $211.96 
               
               
                 Aug. 1, 2021 
                   
                 0.25000000000 
                 999.34 
                 $193.43 
                 109.9986% 
                 $212.77 
               
               
                 Aug. 13, 2021 
                 $1,000.00   
               
               
                   
               
             
          
         
       
     
       EXAMPLE 1 (PART 2/7)  
     EXAMPLE 1 (PART 3/7)  
     EXAMPLE 1 (PART 4/7)  
     EXAMPLE 1 (PART 5/7)  
     EXAMPLE 1 (PART 6/7)  
     EXAMPLE 1 (PART 7/7)  
       [0027]     For example (see Example 1), assume a contingent conversion long term zero coupon instrument is issued on Aug. 13, 2001. Using the $1,000 price of the bond discounted by a yield of 2.0%, the price of the bond is calculated at issue to be $671.65. The stock price at issuance is $100.00. The initial conversion premium of 30% is applied to the stock price to calculate the initial conversion price of $130.00. The initial bond price of $671.65 divided by the initial conversion price of $130.00 will result in the conversion ratio of 5.1665. A trigger of 120%, decreased by 0.1266% per quarter, may be multiplied by the conversion price to determine the trigger price at which time the instrument is convertible by holders. In other embodiments, the trigger might remain constant or change at a different rate or more or less frequently.  
         [0028]     The pricing of the financial instrument, at anytime, may be based on any of the following factors or any combination thereof: 
        1. the contingency,     2. the value of the underlying reference,     3. volatility in trading value of the underlying reference,     4. time until redemption, at option of issuer or holder,     5. time until maturity,     6. an interest rate, and     7. the value for which the financial instrument must be redeemed for on the redemption date.        
 
         [0036]     In some embodiments, other contingencies may result in conversion, such as, for example, upon an issuer&#39;s optional redemption, or as a result of certain change of control events or anti-dilution provisions.  
         [0037]      FIG. 1  is a flowchart of the illustrative steps involved in issuing and servicing contingently convertible financial instruments in accordance with some embodiments of the invention. The method starts at step  101  where a company, or other entity, issues a financial instrument (e.g., a debenture). Furthermore, at step  101 , the original principal amount of an instrument may equal an amount based on pre-determined terms.  
         [0038]     The method then proceeds to step  102 , where interest payments are calculated. At step  103 , if the issuer decides to redeem the instrument, the method proceeds to step  104  to calculate the redemption price. In a preferred embodiment, when a company decides to redeem its instruments, it may redeem some or all of the instruments issued under the same offering. Moreover, if the instruments are redeemed before a pre-selected date, the system may add a premium to the redemption amount.  
         [0039]     At step  105 , if the conversion contingency is satisfied, the method proceeds to step  106 . If not, the method proceeds to step  108 . The holder or other interested party, under step  106 , may convert the instrument to the underlying security. The method may either allow a conversion or exchange at any time after issue, or may require that conversions or exchanges occur during an allocated period of time after issue.  
         [0040]     At step  108 , automatically evaluates whether the holder has put the security. If yes, the method, at step  109 , computes the put value.  
         [0041]     If, however, the method evaluates that the holder has not put the security at step  108 , the method proceeds to step  111 . At step  110 , if the bond has reached maturity, the method then calculates the value of the instrument under step  111 . Otherwise, the method return to step  102 . Finally, at step  112 , the method may process a conversion or a payment to the holder for the value of the matured instruments and any additional payments due.  
         [0042]      FIG. 2  is a flowchart of illustrative steps involved in determining whether to convert an instrument, in accordance with some embodiments of this invention. The method  200 , at step  201  determines whether the instrument is convertible. If not, the method ends. If so, the method, at step  202 , computes the value of the instrument if converted. At step  203 , the method computes the value of the instrument if not converted. At  204 , the method determines whether the continuation value is less than the conversion value. If so, a signal to convert is generated at step  205 . If not, the method ends.  
         [0043]      FIG. 3  is a flowchart of illustrative steps involved in redeeming the convertible instrument, as shown at step  103  of  FIG. 1 . The method  300  may be used when, for example, the issuer decides to redeem instruments issued under one offering document. At step  301 , the issuer decides that it no longer wishes to keep the instruments outstanding and that it wants to redeem the instruments. At step  302 , the method calculates the current market value of underlying shares at the time of redemption plus any deferred payments. At step  303 , the method pays out the appropriate redemption amount, as calculated at step  302 .  
         [0044]      FIG. 4  is a flowchart of illustrative steps involved in converting convertible debt instruments as shown in  FIG. 1  at step  105 . The method may be used if, at step  401 , the holder or other interested party determines that he or she wants to convert the instruments for the underlying security. Under this method, the holder can convert, or exchange depending on the types of instruments, but may incur a penalty. At step  402 , the holder delivers a conversion notice to the trustee. At step  403 , the method determines whether the conversion may occur by satisfying a contingency. Thus, at step  403 , the method directs the instruments that may be converted to step  404 , and directs those that may not to step  405 . The method at step  404  converts or exchanges the instruments based on pre-determined offering terms.  
         [0045]      FIG. 5  shows the flow of information in a system for issuing and servicing contingent convertible financial instruments. A potential holder  501  requests an offering document that describes the terms of the security. Upon receiving the offering document and purchasing an instrument from the issuer  509  or through a third party, the transfer agent  502  may track the underlying reference security and service the security using, for example, the methods described in  FIGS. 1-4 . In doing so, the transfer agent preferably will use a computerized accounting system  503  capable of tracking the underlying reference security via data lines (network (not shown) or modem  507 ), tracking any dividend and pay-out from the underlying security, making calculations as disclosed in the instrument&#39;s offering document, and using a printer  505  to print periodic (e.g., annual) reports and statements reporting the instrument&#39;s value, and gains to the holder for tax reporting purposes.  
         [0046]     In addition, the accounting system  503  may maintain pricing data (i.e., issue date, reference underlying instrument&#39;s price at time of issue, deferred dividends, etc.) in its mass storage system  506 . In addition to the data received through the network or modem  507 , the data may be inputted into the accounting system using keyboards  508 . The system&#39;s modem  507  and network lines may be used to transfer funds to a holder or to a third party intermediary and the printer  505  may also print checks that are delivered directly to the third party or to a third party intermediary. Finally, the transfer agent may view the data from the accounting system using a CRT  504  or reports prepared by the accounting system  503  and printed using the system&#39;s printer  505 .  
         [0047]      FIG. 6  offers an overview of some embodiments of a system  600  for implementing the method according to the invention. A reference underlying instrument identifying unit  601  is provided to identify (e.g., by user keyboard entry) a reference underlying instrument. An attribution unit  602  is used to attribute a number of the reference underlying instrument&#39;s shares to the instrument to be issued. Based on the price of the reference underlying instrument and the attributed number of reference instruments, a pricing unit  603  will establish a price for the instrument to be issued. The pricing unit may also use other factors to establish a price.  
         [0048]     For example: 
        1. the volatility in the trading price of the reference underlying instrument;     2. the time until redemption of the instrument by either the issuer or holder;     3. the time until the instrument&#39;s maturity;     4. the instrument&#39;s redemption value;     5. an interest rate; and     6. the triggering contingency.        
 
         [0055]     A selling unit  604  processes sales of the instrument to interested investors or buyers at the price determined by pricing unit  603 . An interest calculator  605 , throughout the term of the instrument, calculates interest due to holders on a periodic basis. Furthermore, a monitoring unit  606  tracks any dividend or pay-out of the underlying reference security. An additional interest calculator  607  calculates the additional interest owed to holders of the instrument.  
         [0056]     If during the term of the instrument, a holder decides to convert the instrument, a conversion value calculator  608  calculates the conversion value of the instrument. The value calculator  609  calculates the value of the instrument at the time of redemption (if the instrument is redeemed early by the issuer), and may also be used at maturity (if the instrument remains outstanding until maturity).  
         [0057]     A deferral unit  610  processes the results of interest calculator  605 , and additional interest calculator  607 , to determine if the calculated amount will be paid or deferred. If the payment amount is not deferred, payment is made by payment unit  611 . Furthermore, payment unit  611  processes and makes payment based on the results of conversion value calculator  608 , and value calculator  609 . Payment may be made by check printed by a printer  612  as commanded by payment unit  611 . Alternatively payment may be made via electronic transfer by modem, network, or other electronic methods of transferring funds  614 . Reports listing payments of interest, and other financial data relevant to the holder for tax reporting purposes or other reportable data are printed using printer  612 . Any such reports meant for holders preferably are printed and sent to holders periodically, and at least annually. Other reports may be required by regulatory agencies and are printed when required by the relevant regulations. Storage  613 , modems  614 , keyboards  615 , and CRT  616  are used by the separate units of system  600 , in a manner similar to that described in connection with  FIG. 5 . Conversion contingency unit  617  determines whether a contingency is satisfied and ultimately whether a conversion may occur.  
         [0058]      FIG. 7  presents a cross section of a magnetic data storage medium  700  which can be encoded with a machine executable program that can be carried out by a system such as system  500  of  FIG. 5  or system  600  of  FIG. 6 . Medium  700  can be floppy diskette or hard disk, having a suitable substrate  701 , which may be conventional, and a suitable coating  702 , which may be conventional, on one or both sides, containing magnetic domains (not visible) whose polarity or orientation can be altered magnetically. Medium  700  may also have an opening (not shown) for receiving the spindle of a disk drive or other data storage device.  
         [0059]     The magnetic domains of coating  702  of medium  700  are polarized or oriented so as to encode, in manner which may be conventional, a machine-executable program such as that described above in connection with  FIGS. 1-4 , for execution by a system such as system  500  of  FIG. 5  or system  600  of  FIG. 6 .  
         [0060]      FIG. 8  shows a cross section of an optically-readable data storage medium  800  which also can be encoded with such a machine-executable program, which can be carried out by a system such as system  500  of  FIG. 5  or system  600  of  FIG. 6 . Medium  800  can be a conventional compact disk read only memory (CD-ROM) or a rewritable medium such as a CD-R or CD-RW disk or a magneto-optical disk which is optically readable and magneto-optically writeable. Medium  800  preferably has a suitable substrate  801 , which may be conventional, and a suitable coating  802 , which may be conventional, usually on one side of substrate  801 .  
         [0061]     In the case of a CD-ROM, as is well known, coating  802  is reflective and is impressed with a plurality of pits  803  to encode the machine-executable program. The arrangement of pits is read by reflecting laser light off the surface of coating  802 . A protective coating  804 , which preferably is substantially transparent, is provided on top of coating  802 .  
         [0062]     In the case of magneto-optical disk, as is well known, coating  802  has no pits  803 , but has a plurality of magnetic domains whose polarity or orientation can be changed magnetically when heated above a certain temperature, as by a laser (not shown). The orientation of the domains can be read by measuring the polarization of laser light reflected from coating  802 . The arrangement of the domains encodes the program as described above.  
         [0063]     Thus, a convertible financial instrument with contingent conversion, and systems and methods for offering and servicing the same are provided. One skilled in the art will appreciate that the present invention can be practiced by other than the described embodiments, which are presented for purposes of illustration and not of limitation.