With respect to convertible bonds (and also convertible preferred stocks), it is the number of shares of common stock in which each bond can be exchanged. This ratio helps determine the strike price of a convertible as follows:
Strike price = bond par value/ conversion ratio
Also it is used to find out the conversion value (or parity value) of a convertible based on the following formula:
Conversion value = stock price x conversion ratio
In calculation, conversion ratio is given by dividing the face value of a convertible by conversion price:
Conversion ratio = face value/ conversion price
For example, if the conversion price is $50 per share and the face value of a bond is $1,000, then the holder would receive 20 shares for each bond:
Conversion ratio = 1,000/50 = 20 shares
The conversion ratio is also known as a conversion rate.
