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What is Conversion Ratio, Conversion Value and Conversion Premium?

 Convertible Security: These are securities that convert into common stock with specified time period Convertible securities are convertible bond and convertible preference share. Convertible bond has a facility to convert it to shares. So, the interest rate is low in comparison to non-convertible bond.

What is Conversion Ratio?

Conversion Ratio: It refers the number of shares a convertible security holder receives after converting its security to shares.

Formula:

Conversion ratio = P/CP

Where,

P = Par value of bond

CP = Conversion price

Conversion Price: It is a price of per shares given to convertible security holder in exchange of shares.

Formula:

Conversion Price = P/CR

Where,

P = Par value of bond

CR = Conversion Ratio

Conversion Value: It is the value of share price an investor receives after converting the bond or preference shares into common shares.

Formula:

Conversion Value = CR* Ps

Where,

CR = Conversion Ratio

Ps=Price per Share

Conversion Premium: Conversion premium is the excess of bond price against conversion value. Higher the premium, it is better for the investor.

Formula:

Conversion Premium = Pb-CV

Where,

Pb = Current Price of Bond

CV =Conversion Value

Example: Convertible bond has Rs.1000 face value and the current market value is Rs.990 per share. The conversion price is Rs.45 per share. The stock price is Rs.50 per share. How many shares are given i exchange of convertible bond.

Solution: In this question you have to calculate the conversion ratio to determine the number of shares.

Conversion ratio = Par value/Conversion Price

= 1000/45

=22 shares

Example: Convertible bond has Rs.1000 face value and the current market value is Rs.1100 per share. The conversion ratio is 20 shares. The stock price is Rs. 32.60 per share. What is the per share price of conversion shares.

Solution: In this question you have to calculate the conversion price to determine the price of per share.

Conversion Price = Par value/Conversion Ratio

= 1000/20

=Rs.50 per share

Example: Convertible bond has Rs.1000 face value and the current market value is Rs.1080 per share. The conversion price is Rs.35 per share. The stock price is Rs. 50 per share. What is the value of conversion?

Solution: Conversion ratio = Par value/Conversion Price

=1000/35

= 29 shares

 Conversion Value = Conversion Ratio* Current Stock Price

= 29*50

=Rs. 1450

Example: Convertible bond has Rs.1000 face value and the current market value is Rs.1780 per share. The conversion price is Rs.28 per share. The stock price is Rs. 42 per share. Find out how much shares an investor gets in exchange of convertible bond and the conversion premium?

Solution: Conversion ratio = Par value/Conversion Price

=1000/28

= 36 shares

Conversion Value = Conversion Ratio* Current Stock Price

= 36*42

=Rs.1512

Conversion Premium = Bond current price –Conversion Value

= 1780-1512

= Rs.268

Investor gets 36 shares in exchange of 1 convertible bond. The conversion value is Rs. 1512.  It means the investor gets Rs.1512 amount after converting the bond to shares. Conversion premium shows the excess amount of bond price traded in market.

 

 

 

 

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