Module 36.8 LOS 36.o: Calculate and interpret the components of a convertible bond’s value

The conversion value of a convertible bond is the value of the common stock into which the bond can be converted. The conversion ratio is the number of shares the holder receives from conversion for each bond. Conversion value is calculated as:

conversion value = market price of stock ├Ś conversion ratio

minimum value of a convertible bond = max (straight value, conversion value)

The market conversion price, or conversion parity price, is the price that the convertible bondholder would effectively pay for the stock if she bought the bond and immediately converted it. The market conversion price is given as:

The convertible bond investor’s downside risk is limited by the bond’s underlying straight value because the price of a convertible bond will not fall below this value regardless of what happens to the price of the issuer’s common stock.

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