What Is the Conversion Ratio?
The conversion ratio is the number of now not strange shares won at the time of conversion for every convertible protection. The higher the ratio, the higher the number of now not strange shares exchanged consistent with convertible protection. The conversion ratio is determined at the time the convertible protection is issued and has an impact on the relative price of the safety. The ratio is calculated by way of dividing the convertible protection’s par worth by way of the conversion price of equity.
Key Takeaways
- The conversion ratio is the number of now not strange shares won at the time of conversion for every convertible protection, harking back to a convertible bond.
- Convertible debt is a debt hybrid product with an embedded selection that allows the holder to develop into the debt into equity at some point.
- The ratio is calculated by way of dividing the convertible protection’s par worth by way of the conversion price of equity.
Working out the Conversion Ratio
There are two main forms of capital fundraising tools: debt and equity. Debt must be paid once more, then again it is eternally reasonably priced to spice up capital by way of issuing debt than by way of acquiring equity on account of tax considerations. Equity does not wish to be paid once more, which turns out to be useful in tough events or when source of revenue growth is destructive.
Raising capital with equity relinquishes ownership, and ownership brings voting rights. Despite the fact that equity takes a once more seat to debt in terms of credit score rating, shareholders have the advantage of proportion price appreciation when source of revenue growth is robust. The interest rate paid to debt holders stays the identical regardless of source of revenue potency.
Every fundraising means has its advantages and drawbacks. One way buyers and corporations take advantage of every worlds is through hybrid securites known as convertibles. The conversion ratio tells buyers what selection of now not strange shares they get in exchange for a convertible bond or stock. The company devices the conversion ratio and date at the time of issue.
The Elements for the Conversion Ratio Is

get started{aligned} &text{Conversion Ratio} = frac{ text{Par Price of Convertible Bond} }{ text{Conversion Price of Equity} } end{aligned} ​Conversion Ratio=Conversion Price of EquityPar Price of Convertible Bond​​
Examples of the Conversion Ratio
The following examples show the conversation ratio in relation to convertible bonds and convertible preferreds.
Convertible Bonds
Convertible debt is a debt hybrid product with an embedded selection that allows the holder to develop into the debt into equity at some point. The registration statement tells buyers the number of shares to be granted.
For example, one bond that can be remodeled to 20 shares of now not strange stock has a 20-to-1 conversion ratio. The conversion ratio will also be found out by way of taking the bond’s par worth, which is most often $1,000, and dividing it by way of the proportion price. A stock purchasing and promoting for $40 has a conversion ratio similar to $1,000 divided by way of $40, or 25.
Convertible Preferreds
Convertible stock is a hybrid equity product. Most well liked stockholders download a dividend like a bond, which ranks higher than equity in case of liquidation, then again they’ve no voting rights. Converting to stock provides the most well liked shareholder voting rights and allows them to have the advantage of proportion price appreciation.
For example, if a company issues convertible most well liked with a 5% dividend and a conversion ratio of five, the investor receives 5 now not strange shares for every proportion of most well liked shares. If the most well liked stock is purchasing and promoting at $100, the conversion break-even price on now not strange shares will also be determined by way of dividing the price by way of the conversion ratio, which is $20.
In every instances, the conversion ratio drives the price of the convertible.
