Conversion Price

Conversion price is a term used in finance and investments to describe the price at which a convertible security, such as a bond or preferred stock, can be converted into common stock. The conversion price is typically set when the convertible security is issued and is based on the market price of the common stock at the time of issuance.

The conversion price is important because it determines the number of shares of common stock that the holder of the convertible security will receive upon conversion. If the market price of the common stock increases above the conversion price, the holder of the convertible security may choose to convert the security into common stock to take advantage of the price increase.

For example, if a convertible bond has a conversion price of $20 per share, and the market price of the common stock is currently $25 per share, the bondholder could convert the bond into common stock and receive 50 shares of common stock for every $1,000 of principal.

The conversion price can also be used to calculate the conversion ratio, which is the number of shares of common stock that the convertible security can be converted into. The conversion ratio is determined by dividing the principal amount of the convertible security by the conversion price.

Conversion prices and conversion ratios are important considerations for investors who are evaluating convertible securities. Investors may analyze the conversion price and ratio to determine whether the convertible security represents a good investment opportunity, and may also consider factors such as the market price of the common stock, the coupon rate or dividend yield of the convertible security, and the creditworthiness of the issuer.

To illustrate some key concepts of conversion price, consider the following example:

Example: A company issues a convertible bond with a principal amount of $1,000 and a conversion price of $25 per share. The bond has a coupon rate of 5% and matures in 5 years.

If the market price of the common stock is currently $20 per share, the bondholder would not choose to convert the bond into common stock because the conversion price is higher than the market price. Instead, the bondholder would continue to receive interest payments on the bond until it matures.

If the market price of the common stock increases to $30 per share, the bondholder may choose to convert the bond into common stock because the conversion price is lower than the market price. The bondholder would receive 40 shares of common stock for every $1,000 of principal upon conversion.

In conclusion, conversion price is the price at which a convertible security can be converted into common stock. The conversion price is an important consideration for investors who are evaluating convertible securities, as it determines the number of shares of common stock that the holder will receive upon conversion. The conversion price is typically set when the convertible security is issued and is based on the market price of the common stock at the time of issuance.