Series 6: 4.2.9.4.1. Conversion Ratios

4.2.9.4.1. Conversion Ratios

The number of shares of stock that a bondholder will receive upon converting the bond is called the conversion ratio and is specified in the indenture. Conversion ratios are set to reflect some price above the price of the company’s stock at the time of the bond’s issuance. Let’s assume the conversion price was set at $20. The formula to calculate a conversion ratio is as follows:

Thus, the conversion ratio is $1,000 / $20 = 50, meaning the investor receives 50 shares for converting one bond.

If the stock is selling at $24 per share and the bondholder decides to convert, the bondholder will receive 50 shares of stock that are worth $24 × 50 = $1,200. The investor would gain $200.