The current value of a convertible bond’s share entitlement: conversion ratio times share price. Distinguish it from bond price, principal and delta.
Conversion value
Conversion value is the current market value of the shares represented by a convertible bond's conversion entitlement. Also called parity, it provides the equity benchmark against which the bond's market price can be compared. It does not value the whole convertible or promise a cash repayment of that amount.
For a simple fixed-ratio, share-settled bond,
Conversion value=qS,
where q is the conversion ratio in shares per bond and S is the current share price in currency units per share. The share units cancel, leaving currency units per bond. Use the ratio effective for that bond and valuation date; adjustments can change it.
Three shares worth 30 each
Consider a fictional bond with a fixed entitlement to three shares per bond. At the valuation instant, the stock trades at 30 currency units per share. Stipulate share settlement, zero accrued interest and no conversion adjustments or other payments for this illustration.
qS=3×30=90currency units per bond.
The 90 is the value of the represented shares, whether the convertible itself trades at 90 or another price. If its separate market price is 110 per bond, the excess is 110−90=20. The percentage conversion premium is 20/90=2/9≈22.2222%. The denominator is the share entitlement's value.
A synthetic fixed ratio of three shares per bond gives conversion value 90 at share price 30 and 93 at share price 31. The straight line is conversion value, not the convertible bond's market price.
Original synthetic illustration. Share prices are currency units per share; conversion values are the same currency per bond. The ratio stays at three shares per bond throughout.
Face amount is a separate contractual quantity. Conversion value is neither the principal payment nor an extra payment automatically added to principal. It is also distinct from the bond floor, which estimates the debt component's value. Coupons, issuer credit and the remaining exercise rights all matter to a complete convertible valuation.
A share quantity is not the bond's delta
With the conversion ratio fixed, a one-unit increase in share price increases conversion value by q currency units per bond. In the example, a move from 30 to 31 raises conversion value from 90 to 93. Algebraically,
∂S∂(qS)=q.
That is the slope of the conversion-value line. The convertible's delta instead measures how its own value responds to the stock price. If V is a model value in currency units per bond, its unnormalised stock delta is ∂V/∂S, measured in shares per bond. Sharing units does not make it equal to q. A hedge needs the sensitivity of the security being hedged, with the model and quote convention identified.
Read the entitlement before using the number
A spot calculation does not establish that conversion can be exercised and settled immediately. Check the eligible conversion dates and conditions, the security delivered, the current ratio and any cash or share settlement election. Some contracts use prices averaged across an observation period rather than one spot price.
For example, Netskope's indenture dated December 22, 2022 distinguishes physical, cash and combination settlement. Its cash settlement uses daily conversion values across an observation period; its conversion rights and accrued-interest treatment have their own provisions. Those are terms of that contract, not universal convertible conventions.
Align the valuation time, currency and quote basis too. A share value for a whole bond cannot be compared directly with a bond price quoted per 100 of face amount. Any currency conversion and treatment of accrued interest must be explicit.
Convertible Terminology and Payoff develops the relationship between conversion ratio, conversion price and the simplified maturity choice. 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, §1.6, pp. 21–23: parity, quote units, premium and convertible delta.
