Conversion Premium

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DEFINITION of 'Conversion Premium'

The amount by which the price of a convertible security exceeds the current market value of the common stock into which it may be converted. A conversion premium is expressed as a dollar amount and represents the difference between the price of the convertible and the greater of the conversion or straight-bond value. Convertibles are securities, such as bonds and preferred shares, that can be exchanged for a specified number of another form (typically common stock) at an agreed-upon price. Convertibles can be converted at the will of the investor or the issuing company can force the conversion.

INVESTOPEDIA EXPLAINS 'Conversion Premium'

The conversion premium compares the current market against the higher of the conversion value or straight-bond value. The conversion value is equal to the conversion ratio multiplied by the common stock's market price. For example, if a company issues a convertible bond that can be exchanged in the future for 50 shares of common stock and the common stock is currently valued at $30 per share, the conversion value is $1500 (50 shares X $30). The straight-bond value, on the other hand, is the value of the convertible if it did not have the conversion option.

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