conversion ratio

Fin

an expression of the quantity of one security that can be obtained for another, for example, shares for a convertible bond

EXAMPLE

The conversion ratio may be established when the convertible is issued. If that is the case, the ratio will appear in the indenture, the binding agreement that details the convertible’s terms.

     If the conversion ratio is not set, it can be calculated quickly: divide the par value of the convertible security (typically $1,000) by its conversion price.

$1,000/$40 per share = 25

In this example, the conversion ratio is 25:1, which means that every bond held with a $1,000 par value can be exchanged for 25 shares of common stock.

     Knowing the conversion ratio enables an investor to decide whether convertibles (or group of them) are more valuable than the shares of common stock they represent. If the stock is currently trading at 30, the conversion value is $750, or $250 less than the par value of the convertible. It would therefore be unwise to convert.

     A convertible’s indenture can sometimes contain a provision stating that the conversion ratio will change over the years.

     Conversion ratio also describes the number of shares of one common stock to be issued for each outstanding ordinary share of a different type when a merger takes place.