Convertible Bonds and Equity Links · Hybrid Securities
Conversion value translates a convertible into the shares it can deliver. Conversion premium measures what you pay above that share value, not a guaranteed future profit.
Start with the contractual ratio
A simple convertible with $1,000 principal and a $50 conversion price has a conversion ratio of 20 shares. That ratio describes delivery under the assumed terms. Some contracts settle partly in cash, use averaging periods or adjust the ratio after defined events. Verify these details before applying the simple formula to a real security.
Translate shares into a comparable value
If the shares trade at $45, 20 shares are worth $900. This is the conversion value, sometimes called parity. If the convertible costs $1,080, the dollar premium to conversion value is $180 and the percentage premium is 20%. The investor is paying for other contractual features and optionality as well as current share exposure.
Dividing the convertible price by its ratio gives an effective conversion price of $54 per share. This is a comparison metric rather than the contract conversion price of $50. Confusing the two can lead to incorrect exercise decisions.
Recalculate when the share price changes
At a share price of $60, the same ratio produces $1,200 of conversion value. The convertible market price may be higher because conversion is optional and future coupons or protections still have value. It may also be affected by credit concerns, settlement restrictions and trading costs. Do not assume the market price always equals the larger of principal and parity.
Treat conversion as an investment decision
Converting can surrender remaining interest, debt priority and time value. Compare executable sale proceeds with the value and timing of delivered shares. Include accrued amounts and broker deadlines where relevant. A large conversion premium is not automatically expensive if the embedded terms justify it, but that conclusion requires analysis beyond arithmetic.
Try it yourself
A $1,000 convertible delivers 25 shares. The stock is $32 and the convertible costs $960. What are parity and the percentage premium?
Show the worked answer
Parity is 25 × $32, or $800. The $160 premium divided by $800 is 20%. The effective purchase price per deliverable share is $38.40.
Further reading
Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.
