The amount or percentage a convertible bond trades above its conversion value. Identify the denominator, quote basis and initial offering convention.
Conversion premium
A conversion premium measures how much a convertible bond costs above the current value of the shares represented by its conversion entitlement. It lets an investor compare the outlay for the bond with buying those shares directly. The comparison is a price measure: it does not by itself establish fair value, a future return or an executable arbitrage.
For a simple share-settled convertible, let P be its market price in currency units per bond, q its conversion ratio in shares per bond, and S the share price in the same currency per share. The conversion value, often called parity, is qS. Then
Conversion premium amount=P−qS,π=qSP−qS.
The percentage premium is 100π%. The fraction requires qS>0. The amount is measured per bond; the fraction is dimensionless. Crucially, the denominator is conversion value, rather than the bond's market price.
Paying 110 for a claim on shares worth 90
Consider a fictional bond with a fixed conversion entitlement of three shares per bond. At one valuation instant, each share is worth 30 currency units and the bond trades for 110 currency units. Stipulate zero accrued interest and share settlement, with no conversion adjustment or other payment in this illustration.
Quantity
Calculation
Result
Conversion value per bond
3×30
90 currency units
Excess over conversion value
110−90
20 currency units
Percentage conversion premium
20/90
Approximately 22.2222%
A fictional bond costs 110 currency units. Three conversion shares worth 30 each give conversion value 90, with excess 20. The percentage premium is 20 divided by 90, approximately 22.2222 percent.
Original synthetic ledger. All values are in the same currency at one valuation instant; bond price and conversion value are per bond, and accrued interest is zero.
Dividing the excess by 110 instead gives approximately 18.18%. That expresses the excess as a fraction of the bond's price, answering a different question. It is not the conversion-premium convention above.
The inputs must also share a quote basis. A bond price quoted per 100 of face value cannot be compared directly with the share value for a whole bond of a different denomination. Convert both to the same amount of face value, use the conversion ratio effective for that amount, align the valuation time and currency, and identify whether accrued interest is included. Cash interest paid or forfeited on conversion, settlement averaging and cash-or-share elections can require a more detailed comparison than qS.
The premium in an offering announcement
An issuer may describe an initial conversion premium by comparing the contractual conversion priceK with a reference share price S0:
πinitial=S0K−S0.
For the simple fixed-ratio convention K=N/q, with face amount N, this equals (N−qS0)/(qS0). It coincides with the market-price formula when the bond price used is N and the same reference inputs apply. An unchanged contractual conversion price does not imply an unchanged market conversion premium when the bond or share price moves.
Bandwidth's June 2026 offering announcement illustrates the initial-price usage. It also describes conditional conversion periods and the issuer's election of cash, shares or a combination for settlement. A reported premium therefore does not prove that the holder can obtain and immediately sell q shares today. The governing contract determines the entitlement and when it can be exercised.
What the premium leaves out
The conversion premium compares the bond with its equity conversion value. An investment premium instead compares the bond with its estimated bond floor, the value of the corresponding debt component. Those are different benchmarks. Neither the conversion-premium amount nor its percentage is a stand-alone valuation of the embedded option.
A small premium is often associated with equity-like behaviour in ordinary convertible-market discussions. It is a heuristic, rather than a measurement of delta: a price ratio at one point does not tell you the slope of the price response. Rates, credit, maturity, dividends and contractual call, put and conversion terms matter for full pricing and risk. Nor is a premium a stock-return hurdle guaranteed to recover the investor's outlay: coupons, dividends, time, credit events and changes in the bond price affect that comparison.
For the two benchmark calculations together, Bond Floor, Parity and Premiums works through conversion and investment premiums. The full lesson requires membership; its preview is public.
Sources
Jan De Spiegeleer and Wim Schoutens, The Handbook of Convertible Bonds: Pricing, Strategies and Risk Management, first edition, Wiley, 2011, §2.3.4, pp. 34–35: premium to parity and the influence of contractual features; §2.3.1, p. 32: bond-floor benchmark.
