The conversion price is the contractual price per share implied by exchanging a convertible bond for shares. For a fixed-ratio bond, it equals the bond's face value divided by the number of shares delivered per bond. It tells an analyst how much principal corresponds to each share; replacing face value with the bond's current market price answers a different question.
Conversion normally involves surrendering the bond claim. The conversion price is not an extra cash payment the holder makes on top of giving up that bond.
Read the units before dividing
Let be face value in currency per bond and the conversion ratio in shares per bond. The contractual conversion price is
The result has units of currency per share. Both inputs must refer to the same amount of bond principal. A ratio quoted per bond cannot be combined directly with a face amount for an entire portfolio. If the shares and bond are denominated in different currencies, the contract's exchange-rate provisions also matter.
Consider a fictional bond with USD100 face per bond, exchangeable for four shares per bond. Stipulate a fixed ratio, physical delivery of shares and eligibility to convert immediately. The contract conversion price is USD per share. This is a currency amount, not a bond quote expressed as a percentage of par.
The bond can cost more than its face value
At the same valuation instant, suppose buying that bond costs USD110, with no accrued interest, fees, taxes or settlement delay. Buying and immediately converting obtains four shares at a gross cost of
That quantity is often called the market conversion price. It is a purchase-cost comparison; it does not amend the contractual USD25 conversion price.
Same bond and conversion ratio, different numerators. All amounts are USD at one valuation instant; immediate eligible physical conversion is stipulated, excluding interest, costs and delays.
If the stock trades at USD26 per share, the four shares have conversion value of USD104 per bond. That exceeds face value, but buying the bond for USD110 and immediately selling the delivered shares for USD104 leaves a USD6 loss before costs. A stock price above the contractual conversion price does not establish a profitable buy-and-convert trade.
At USD25 per share, the shares equal the USD100 face amount. At USD27.50, they equal the stipulated USD110 purchase cost. Neither comparison, by itself, says whether an existing holder should exercise early: conversion can surrender remaining coupons and optionality. The Convertible Terminology and Payoff lesson develops the simplified maturity payoff and the conversion rights that qualify it; the full lesson requires membership, with a public preview.
A contract term can change without becoming a market quote
“Fixed” describes the stipulated ratio, subject to the actual documents. Anti-dilution adjustments, resets or make-whole provisions can change the applicable ratio and therefore the corresponding conversion price. A lower conversion price at unchanged face value means more shares per bond. Separately, some financings use a formula tied to a future market price: Investor.gov distinguishes those arrangements from conventional fixed-price conversion.
The conversion price alone also does not establish when conversion is permitted or what is delivered. For a concrete historical example, MicroStrategy's March 2024 note announcement describes conversion conditions, adjustments and an issuer choice among cash, shares or a combination. A simple face-to-share calculation explains the contractual reference price; valuing the whole security requires its cashflows, credit risk and exercise and settlement terms.
Sources
- De Spiegeleer, J. and Schoutens, W. (2011), The Handbook of Convertible Bonds: Pricing, Strategies and Risk Management, Wiley, Chapter 1, §1.1, pp. 3–4 and conversion-data table, p. 16.
- SEC Investor.gov: Convertible Securities — fixed versus market-price-based conversion formulas.
- MicroStrategy's 15 March 2024 convertible-note pricing announcement, filed with the SEC — a historical illustration of eligibility, settlement choices and adjustments, rather than a universal term sheet.