Conversion ratio definition
/What is the Conversion Ratio?
The conversion ratio specifies the number of common shares that a holder of a convertible security is entitled to receive upon conversion. It determines the equity participation embedded in the instrument and directly affects its potential value. The ratio is inversely related to the conversion price and is central to dilution analysis. Changes to the conversion ratio can occur through contractual adjustments or corporate actions. Clear definition of the conversion ratio is essential for valuation, accounting classification, and investor decision-making.
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Example of the Conversion Ratio
Filigree Corporation has issued convertible bonds that allow bondholders to convert their bonds into shares of the company’s stock. Each bond has a face value of $1,000 and can be converted into 50 shares of Filigree’s common stock. This means that for every bond worth $1,000, a bondholder can convert it into 50 shares of Filigree stock. If the company’s stock price rises to $30 per share, the market value of the shares received would be $1,500 (50 shares × $30 each), providing an incentive for bondholders to convert their bonds into stock.