Conversion price

The conversion price is the price at which a convertible security can be swapped for the common stock of the issuer. The conversion price is set at the time when a convertible security is issued, and is based on the conversion ratio, which is stated in the underlying legal documents for the convertible security. The conversion price is usually set at a level significantly higher than the current market price of the related common stock, so that only a notable increase in the market price will tempt investors to swap their current security holdings for common stock. A conversion feature is valued by investors, so they are willing to accept a somewhat lower effective interest rate on a bond if the conversion price is low enough to make it reasonably likely that the bond will be converted to common stock at a later date.

Related Courses

Accounting for Investments 
Corporate Finance 
Treasurer's Guidebook