Posted in Finance, Accounting and Economics Terms, Total Reads: 746
Definition: Conversion Ratio
It is the number of shares of common stock that is expected to receive on executing the option of converting a security (say preferred bonds) into common equity. This ratio is fixed at the time of issue of the security and in mathematical terms it can be expressed as-
Conversion Ratio = Par value of convertible bond/conversion price of equity
Thus, it is clear that higher the conversion ratio. Higher is the number of common shares received by converting the security. Since, this ratio is decided in advance at issue, it also affects the security prices in the market.
Certain issues carry a clause where the ratio can be increased in case of stock splits so as to protect the security holder against dilution.