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Definition: Conversion Parity Price
It is the price that an investor effectively pays while exercising the option for converting securities into shares. It is calculated by dividing the price of the convertible bond with the conversion ratio, which is the number of shares the convertible security can be converted into. It is also called as market conversion price.
Example – Convertible bond with a par value of Rs. 1,000 can be converted into 50 shares of common stock. The conversion price parity would be Rs.20 (Rs.1000/50 shares).
The conversion is helpful when conversion price parity is hovering around the market price of the stock and the market price of the stock is expected to rise in the coming days.
Suppose in above example the current stock price is Rs.20, then the stock price and bond price are at parity. However If the stock is selling for less than Rs.20, then it is selling below parity, and if it is selling for more than Rs.20, then the stock is selling above parity.
When the Bond is initially issued, the bond price is usually higher than the conversion parity price. Thus at the time of conversion the difference between the bond price and conversion price is called the conversion premium.