Discover how the conversion price works to understand the pre-set value at which a convertible security transforms into equity shares.
The conversion price is the predetermined price at which a convertible security, such as a bond or preference share, can be exchanged for equity shares of the issuing company. It serves as a reference point for evaluating the terms under which the security may be converted into shares. Companies define this price at issuance to provide clarity and transparency.
The conversion price plays a central role in understanding the value and attractiveness of convertible securities.
Conversion price refers to the price at which each unit of a convertible security can be exchanged for a single equity share. It helps determine how many shares an investor receives upon conversion.
Key elements include:
Defined at the time of issuing the convertible instrument
Can be fixed or based on a formula tied to future market prices
Indicates potential dilution after conversion
Forms the basis for calculating conversion ratio
Helps investors assess whether conversion is financially beneficial
A lower conversion price typically means more shares upon conversion, while a higher price limits the number of shares received.
The conversion price is closely linked to the conversion ratio, which indicates how many shares an investor receives for each unit of the convertible security.
The general formula is:
Conversion Price = Face Value of Convertible Security ÷ Conversion Ratio
Key terms used:
Face value: The original value of the convertible bond or preference share
Conversion ratio: Number of equity shares received per security
This formula ensures consistency in calculating equity received from a convertible instrument.
The below mentioned example illustrates how conversion price works.
Scenario:
A company issues convertible bonds worth INR 1,000 each. The conversion ratio is set at 20 shares per bond.
Calculation:
Conversion Price = 1,000 ÷ 20
Conversion Price = INR 50
This means each share received upon conversion is valued at INR 50 according to the terms of the convertible bond.
This price can be compared with the prevailing market price of the share to understand how the stated conversion terms relate to current market valuations.
The following table highlights the comparison between conversion price and market conversion price:
| Basis | Conversion Price | Market Conversion Price |
|---|---|---|
| Meaning |
Price defined in the terms of the convertible instrument |
Price based on current market value of shares received upon conversion |
| Derived from |
Conversion formula |
Share market price at conversion |
| Stability |
Fixed or formula-based |
Fluctuates with market conditions |
| Use |
Determines conversion ratio |
Evaluates conversion profitability |
| Decision relevance |
Helps structure convertible securities |
Helps investors assess conversion timing |
Both terms are related but serve different purposes in the evaluation of convertibles.
Several factors influence the conversion price set by issuers.
Common determinants include:
Current market price of equity shares
Company’s future growth expectations
Interest or dividend rate offered on the convertible security
Investor appetite for hybrid instruments
Dilution considerations and ownership structure
Market conditions and volatility
Regulatory guidelines
Issuers typically balance investor attractiveness with dilution risk.
Conversion price carries implications for both issuers and investors.
Impact on investors:
Determines the potential value of shares received after conversion
Provides information on how the value of the equity received upon conversion compares with the terms of the original instrument
Affects decision timing for conversion
Impact on companies:
Influences future dilution of equity
Helps raise capital at lower interest or dividend cost
Facilitates flexible capital structuring
A clearly defined conversion price can contribute to clarity in financial planning for both parties.
Some misunderstandings often arise around conversion price.
Frequent mistakes include:
Confusing conversion ratio with conversion price
Assuming the conversion price always reflects market value
Overlooking dilution impact after conversion
Misreading terms such as soft call, hard call, or reset clauses
Ignoring adjustments for stock splits or bonus issues
Understanding these aspects can provide clarity when analysing convertible securities.
Conversion price is a key concept in evaluating convertible securities, as it defines the terms under which investors can convert their instruments into equity. It affects dilution, investor returns, and the overall financial structure of the issuing company. Comparing the conversion price with the market conversion price helps determine whether conversion is favourable.
Key takeaways:
Conversion price is the predefined price at which a convertible security converts into shares.
Calculated using face value and conversion ratio.
Used to understand how the stated conversion terms compare with current market conditions.
Different from the market conversion price, which reflects current market valuations.
Impacts dilution, investment outcomes, and capital planning.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The conversion price formula is expressed as: Conversion Price = Face Value of Security ÷ Conversion Ratio. The calculation shows the implied value per share when a convertible instrument is exchanged for equity.
Conversion price is calculated by dividing the face value of the convertible security by the number of equity shares received upon conversion. The result indicates the price at which the security effectively converts into shares.
Conversion price represents the implied cost per share during conversion, whereas conversion ratio indicates how many shares are issued for each convertible security. The two measures serve different roles in evaluating the terms of conversion.
Market conversion price refers to the effective price per share based on the current market value of the equity received upon conversion. The measure helps show how the market values the converted shares compared with the instrument’s stated terms.
Conversion price is important because it helps determine the attractiveness of conversion, provides insight into potential dilution, and supports the evaluation of a convertible security’s overall value. The measure is a key reference point when assessing conversion terms.
Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact.
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