The reset feature In a reset convertible, the conversion price resets at certain dates as a function of the stock price during the preceding period. When the conversion price is reset downward, it makes the bond more expensive. The reset occurs to compensate the bond holders for a reduction in the price of the stock.
Many convertible bonds exhibit several reset dates.
Of course, the conversion price on the second reset date depends on the conversion price set on the first reset date. This in turn depends on the initial conversion price. If the bond has three reset dates, the conversion price on the third reset date depends on the conversion price set on the second date which depends on the conversion price of the first reset date, etc. In some convertible bonds, the conversion price may not reset downward below a certain multiplier of the first conversion price. Other convertibles, as in our example, allow the conversion price to reset based upon the previous conversion price.