What it means
Conversion value strips a convertible down to its equity content. It ignores the coupon, the maturity date and the credit quality of the issuer, and simply asks what the underlying shares are worth right now.
The figure matters because it sets one of two floors under the price of a convertible. The other floor is the straight bond value, which is what the security would fetch as ordinary debt, and in practice a convertible trades above whichever floor is higher.
When the share price is low, the straight bond value dominates and the security behaves like a bond. When the share price is high, conversion value takes over and the security moves almost tick for tick with the equity, which is why convertibles are often described as having a split personality.
Analysts use conversion value as the base for the conversion premium, which is the market price minus the conversion value. Tracking that gap over time shows whether investors are treating the security mainly as debt or mainly as equity.
One point often missed is that conversion value can be calculated at any moment, but the holder cannot always act on it. Conversion windows, notice periods and lock-up provisions can all mean the value on screen is not the value that can actually be captured today.
In practice
Real-world examples.
Example
A treasurer reviewing outstanding convertibles notes that conversion value has risen from $780 to $1,240 per bond after a strong year. She flags to the board that holders now have a clear incentive to convert, and models the resulting share issuance in the next three-year plan.
Example
A credit analyst at an insurer holds convertibles in a struggling packaging group. Conversion value has fallen to $310 per bond while the straight bond value is $860, so he stops watching the share price and focuses entirely on the issuer's ability to repay.
Example
An arbitrage desk spots a convertible quoted at $1,090 when its conversion value is $1,115. It buys the bond, converts, sells the shares, and captures the $25 difference per bond before the mispricing closes.
Formula
Calculation
Conversion value = Conversion ratio x Current share price. The conversion premium is then Market price of the convertible - Conversion value.
A specialty chemicals company has convertible bonds outstanding with a face value of $1,000 and a conversion price of $40, giving a conversion ratio of $1,000 / $40 = 25 shares per bond. The shares currently trade at $46.
Conversion value = 25 x $46 = $1,150 per bond.
The bond itself trades at $1,190. The conversion premium is $1,190 - $1,150 = $40, or $40 / $1,150 = 3.5% of conversion value. Meanwhile the straight bond value, based on what similar unconvertible debt from the same issuer yields, is only $920. Because the conversion value of $1,150 comfortably exceeds the straight bond value of $920, the equity side is doing the work, and the small 3.5% premium confirms the bond is now trading almost as a share substitute.Case study
Seen in the real world.
This example is illustrative and the business is fictional. Pemberton Specialty Chemicals, an invented manufacturer, had convertibles outstanding whose conversion value sat well below the straight bond value for three straight years. Management got used to describing the issue as plain debt in board papers and stopped mentioning the equity component at all.
A single large contract then lifted the share price by 70% in four months, pushing conversion value from $640 to $1,180 per bond and well past the $900 straight bond value. Almost overnight the security switched from behaving like a bond to behaving like equity, and the finance team had to explain to the board why a debt instrument was suddenly a dilution question.
Pemberton now reports conversion value, straight bond value and market price side by side every quarter. The point of this fictional story is that a convertible's character changes with the share price, and the reporting has to keep up.
Watch out
Common mistakes.
- Confusing conversion value with the market price of the convertible. Conversion value is only the equity component, and the security nearly always trades above it because the bond features are worth something too.
- Using the conversion price rather than the current share price in the calculation. Conversion value is a live market figure, so it changes every time the share price moves.
- Assuming a conversion value above the straight bond value means holders will convert straight away. Many wait for the coupons and convert only near maturity or when the issuer forces the issue.
Questions
People also ask.
What is parity in this context?
Parity is simply another name for conversion value, the point at which the convertible and the underlying shares are worth the same.
Can conversion value fall to almost nothing?
Yes, if the share price collapses, in which case the straight bond value becomes the relevant floor and credit quality becomes the main concern.
Why would a convertible ever trade below conversion value?
It should not for long, because arbitrageurs would buy the bond, convert and sell the shares, though brief gaps can appear in illiquid issues or during conversion blackouts.
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