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Understanding Conversion Price

Anshika

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.

What Is Conversion Price

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.

Conversion Price Formula

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.

Conversion Price Example

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.

Conversion Price vs Market Conversion Price

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.

Factors Affecting Conversion Price

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.

Impact on Investors and Companies

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.

Common Mistakes

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.

Conclusion & Key Takeaways

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.

Disclaimer

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.

FAQs

What is the conversion price formula?

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.

How to calculate conversion price?

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.

What is the difference between conversion price and conversion ratio?

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.

What is market conversion price?

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.

Why is conversion price important?

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.

Hi! I’m Anshika
Financial Content Specialist

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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