Convertible Bond Calculator: Conversion Value, Premium and Payback
Find a convertible bond’s conversion ratio, conversion value, conversion premium, market conversion (parity) price, premium payback period and straight-bond floor from the conversion terms, share price and bond price.
How it works
Conversion ratio = par ÷ conversion price · Conversion value = ratio × share price · Conversion premium = bond price − conversion value (premium % = premium ÷ conversion value) · Market conversion price = bond price ÷ ratio · Payback = premium per share ÷ (coupon ÷ ratio − dividend per share) · Straight value = PV of coupons and par at a non-convertible yield
A convertible bond can be exchanged for a fixed number of shares, the conversion ratio, which equals par divided by the conversion price. Enter the terms either way. The conversion value (also called parity) is what those shares are worth at today’s share price. A convertible usually trades above its conversion value because it also pays interest and returns par at maturity; that gap is the conversion premium. Dividing the bond price by the ratio gives the market conversion price, the share price at which converting would break even, so the premium per share is how far the stock must rise before converting beats holding the bond. The premium payback period divides that premium per share by the bond’s yearly income advantage per share: the coupon spread over the shares, minus the dividend those shares would pay. Some analysts quote a yield-based break-even instead, the premium % divided by the bond’s current yield minus the stock’s dividend yield; it compares equal dollar amounts and gives a different number, so the calculator shows it in the notes. Under More options, the calculator also values the bond as if it could not convert, discounting its semiannual coupons and par at the yield of a similar plain bond. That straight value is the floor the price tends to hold if the stock falls, and the premium over straight value shows how much you pay for the conversion option. The table shows the conversion value at higher and lower share prices.
Worked example
Default: a $1,000 bond with a $50 conversion price converts into 1,000 ÷ 50 = 20 shares. At $45 a share the conversion value is 20 × 45 = $900. At a $1,050 bond price the conversion premium is $150, or 16.67%, and the market conversion price is 1,050 ÷ 20 = $52.50, a $7.50 premium per share. With a 4% coupon ($40 a year, $2.00 per share) and an $0.80 dividend, the bond earns $1.20 more per share each year, so the premium pays back in 7.50 ÷ 1.20 = 6.25 years. Valued as a 5-year plain bond at a 6% yield, it is worth $914.70, so the $1,050 price is 14.79% above its straight value.
Sources: Achievable (FINRA Series 7): Convertible bonds, parity and conversion examples · ThisMatter: Convertible bonds (premium and payback) · Wall Street Prep: Conversion ratio · HKUST FINA690K: Convertible bond worked example (premium and yield break-even)
Frequently asked questions
How do I calculate the conversion value of a convertible bond?
Multiply the conversion ratio (shares per bond) by the current share price. If you only know the conversion price, the ratio is par divided by the conversion price: a $1,000 bond convertible at $50 gives 20 shares, worth $900 at a $45 share price.
What is the conversion premium telling me?
It is how much more the bond costs than the shares it converts into. A high premium means the bond trades more like a bond, with more downside protection and less stock sensitivity; a low or negative premium means it moves closely with the stock.
What is the premium payback period?
It is the number of years the bond’s extra income, coupon per share minus the dividend per share, takes to make up the premium per share you pay over the shares. A short payback makes the bond more attractive than buying the stock outright.
When does it make sense to convert?
Usually only when the conversion value is above the bond price and you want the shares, or when the bond is called. Before then, holding usually keeps both the coupon and the upside, because the bond tends to trade at or above its conversion value.
Does the conversion price change?
It is fixed at issuance but can be adjusted for stock splits, large dividends or other anti-dilution events spelled out in the bond’s indenture. After a 4-for-1 split, for example, a $50 conversion price becomes $12.50 and the ratio rises from 20 to 80 shares.
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Educational estimate, not investment advice. Convertible bonds carry credit, equity and call risk; read the offering documents or ask a financial advisor.