Conversion Ratio

What is Conversion Ratio

The conversion ratio is a measure used in the field of finance to determine the number of securities that can be converted into another security. It is commonly used in the context of convertible bonds, which are bonds that can be converted into shares of stock at the holder's discretion. The conversion ratio is typically stated in the bond indenture and determines the number of shares of stock that can be received for each bond.

For example, if a convertible bond has a conversion ratio of 10, it means that for every bond held, the holder can convert it into 10 shares of stock. The conversion ratio can be adjusted based on various factors, such as changes in the market price of the underlying stock or changes in the terms of the bond.

The conversion ratio is an important factor to consider when evaluating convertible bonds, as it can affect the value of the bond and the potential return on investment for the bondholder. A lower conversion ratio may result in a lower potential return, while a higher conversion ratio may offer a higher potential return.