What Do Investors Get on Conversion of Convertible Securities?

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What Do Investors Get on Conversion of Convertible Securities?

The amount of stock investors receive when they exchange their convertibles for common stock depends on the conversion price, set when the company issued the convertibles. For instance, if you buy a $1,000 convertible bond that enables you to exchange it for 20 shares of common stock, the conversion price equals $1,000 divided by 20, or $50.

Things To Know

  • The amount of stock investors receive when they exchange their convertibles for common stock depends on the conversion price.

How the conversion ratio works

The amount of stock investors receive at conversion is expressed as the conversion ratio—also set at the time the company issues the convertibles. The conversion ratio equals the number of shares of common stock you receive in exchange for one convertible bond. If you buy a $1,000 bond and can exchange it for 20 shares of common stock, the conversion ratio is 20/1. You also can calculate the conversion ratio by dividing the par value of the bond—in this case, $1,000—by the conversion price, which is $50 in our example. If the price of the common stock rises to $55 and you decide to convert your bond to stock, you will receive the 20 shares, which you can sell for $1,100 ($55 x 20 shares), or you can hold the common shares in anticipation of increased appreciation.

When you exchange convertible preferred stock for common stock, you often—but not always—receive a number of common shares equal to the number of preferred shares owned.