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 rate helps determine the strike price of a convertible as follows:
Strike price = bond par value/ conversion rate
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 rate
In calculation, conversion rate is given by dividing the face value of a convertible by conversion price:
Conversion rate = 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 rate = 1,000/50 = 20 shares
The conversion rate is also known as a conversion ratio.
