Conversion Ratio

The number of common shares received at the time of conversion for each convertible security. It is calculated by using this formula:

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The higher the ratio, the higher the number of common shares exchanged per convertible security. The conversion ratio is determined at the time the convertible security is issued and will have an impact on the relative price of the security.

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Relationship that determines how many shares of common stock will be received in exchange for each convertible bond or preferred share when the conversion takes place. It is determined at the time of issue and is expressed either as a ratio or as a conversion price from which the ratio can be figured by dividing the par value of the convertible by the conversion price. The indentures of most convertible securities contain an antidilution clause whereby the conversion ratio may be raised (or the conversion price lowered) by the percentage amount of any stock dividend or split, to protect the convertible holder against dilution.

Number of shares of common stock that may be obtained by converting a convertible bond or share of convertible preferred stock:

Conversion Ratio (Rate) = Face Value/Conversion Price

For example, if the conversion price is $25 per share and the face value of a bond is $1000, then an investor would receive 40 shares for each bond ($1000/$25 per share).