Conversion ratio

The conversion ratio is the number of common shares that the holder of a convertible security could receive by submitting the security to the issuer for conversion. The size of the ratio is stated in the agreement accompanying the convertible security at the time of its issuance. For example, when the holder of a convertible bond with a face value of $1,000 can trade it in for a conversion price of $20 per share, the holder will receive 50 shares of the issuer's common stock.

When there is a high conversion ratio associated with a convertible security, this tends to increase the price of the security, since investors have an opportunity to convert it into more of the issuer's common stock. An issuer that does not want to pay back a bond can set a favorable conversion ratio, which encourages investors to swap their bond holdings for common stock.

Related Courses

Accounting for Investments 
Corporate Finance 
Treasurer's Guidebook