How Convertible Bond Value Works
A convertible bond (CB) is a fixed-income security that can be converted into a predetermined number of shares at the holder's discretion. Conversion value equals (Face Value / Conversion Price) × Current Stock Price. This represents the equity value of the bond if converted today.
The conversion premium measures how much more (or less) the bond trades relative to its conversion value. A positive premium means the bond's market price exceeds its conversion value — hold the bond. A negative premium means conversion delivers more value than the bond price — convert and sell. Parity is the conversion value as a percentage of the bond price; above 100% signals conversion is advantageous.
Frequently Asked Questions
Conversion is profitable when the conversion value (shares × stock price) exceeds the bond's current market price. This typically happens when the stock price rises well above the conversion price.
The conversion ratio is the number of shares per bond upon conversion: Face Value / Conversion Price. A $10,000 bond with a $50 conversion price has a ratio of 200 shares per bond.