Conversion Ratio

A convertible bond's conversion ratio equals:

1. A.Par value divided by the conversion priceCorrect - shares per bond at conversion.
2. B.Coupon divided by priceThis is the current yield formula imported from a different topic. How much interest the bond pays says nothing about how many shares it turns into on conversion.
3. C.Price divided by parThis flips the fraction. Dividing a per-share conversion price into par is what yields a share count; running it the other way produces a fraction well below one, which cannot be a number of shares.
4. D.Market price times sharesMultiplying a share price by a share count produces a dollar amount, which is the conversion value of the bond rather than the ratio. The ratio is a count of shares and has to be known before that value can be computed.

Why: Conversion ratio = par value divided by the conversion price.

A convertible bond has a 25 conversion price and 1,000 par. If the stock trades at 30, the parity (conversion) value of the bond is:

1. A.40 dollarsForty is the conversion RATIO, the number of shares the bond converts into (1,000 par divided by the 25 conversion price). It is a share count, not a dollar value; parity requires multiplying it by the 30 market price.
2. B.1,000 dollarsThis is the par value, what the bond pays at maturity, not what the underlying shares are worth. With the stock at 30 and the conversion price at 25, the shares received are worth more than par.
3. C.1,200 dollarsCorrect - 40 shares x 30.
4. D.750 dollarsThis multiplies the conversion price by the stock price (25 x 30), mixing two figures that never belong together. The ratio comes from dividing par by the conversion price, 1,000/25 = 40 shares, and parity is 40 x 30 = 1,200 dollars.

Why: Conversion ratio = 1,000 / 25 = 40 shares; parity = 40 x 30 = 1,200 dollars.