The conversion ratio determines the number of shares of common stock a convertible bondholder would receive if the bond were converted into stock. The conversion ratio is set at the issuance of the security and is typically protected against dilution. It may well specify partial shares (i.e., 21.3 shares).
The conversion ratio is usually adjusted for stock splits and stock dividends. The initial conversion ratio in our example was 20 shares of stock per each convertible bond. The conversion ratio would be adjusted to 22 following a 10 percent stock dividend. Although convertible bondholders are not protected against normal cash dividends, in some cases they are protected against dividends that result from a spin off of assets. (Cash or stock dividends paid out to stockholders might reduce the value of the stock and result in a convertible bond with a lower value.)
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.
Past performance is no guarantee of future results.