What Is Conversion Value?
The term conversion value refers to the financial worth of the securities obtained by exchanging a convertible security for its underlying assets. Convertibles are a category of financial instruments, such as convertible bonds and preferred shares, which can be exchanged for an underlying asset, such as common stock.
Conversion value is calculated by multiplying the common stock price by the conversion ratio.
Key Takeaways
- Conversion value is the amount an investor would received if a convertible security is changed into common stock.
- This value is arrived at by multiplying the conversion ratio (how many shares received per bond) by the market price of the common stock.
- Conversion value calculations are useful in determining break-even or floor values involved with holding convertible securities.
Understanding Conversion Value
As with types of investments such as stock options, a key objective with a convertible security is to hold onto it until the market price is higher than the conversion value, thus generating profit through the conversion and later sale of the common stock received.
The conversion value is closely related to the market conversion price or parity value, which are used to identify break-even values at a particular stock price. The conversion value, on the other hand, calculates what the net value would be to a conversion done right now at current market prices in the stock.
A convertible security that is trading at a price above its conversion value is said to have a conversion premium. This makes the security valuable and desirable. A convertible security is considered "busted" when it is trading at a price far below its conversion value. If the price of the underlying security falls too far below the conversion value, the convertible security is said to have reached its floor.
How Conversion Value Is Determined
Understanding what the floor value is for convertible bonds can help the bond holder determine when the underlying asset is worth converting. This includes knowing the face value for the bond. For instance, typically, when a convertible bond reaches maturity, the holder gets the face-valueprincipal payment that is equal to the amount they initially paid for the bond. The bond has also been generating interest over the course of the maturity period.
The floor value can be determined even before the bond reaches maturity through a calculation. Adding the principal payment to the interest payments, or bond yield, that have been received and are expected until it reaches maturity will result in the floor value. That is the figure that can be used for comparison against the conversion value to assess the worth of the securities.
In many examples, it is not profitable to exercise an option to convert, if allowed, before a convertible security matures. There may be stipulations that require the security to be held until it reaches a certain conversion price. It might be necessary for the issuers of convertible notes to bifurcate, or divide the fair value or price of a convertible bond between fair values for the conversion aspect and for the straight debt, which cannot be converted.
Example of Conversion Value
Suppose that investor owns convertible bonds in XYZ Corp., and decides to utilize the call option in order to convert those bonds into common shares of the company.
Assuming that the bond’s conversion ratio is 50 shares per bond, and the bond shares of XYZ stock are trading at $20, then the conversion value of one bond would be $1,000 (i.e. 50 x $20)
FAQs
For example, if a bond can convert into 30 stocks, it has a conversion ratio of 30. Now that you have that conversion ratio, you can multiply it by the stock's current share price. That number you get is the conversion value.
How to work out conversion value? ›
Conversion value is calculated by multiplying the common stock price by the conversion ratio.
What are conversion actions examples? ›
Website actions are the most common conversion type. You can track a number of specific actions, such as making an online purchase, signing up for a newsletter, filling out a form (for a quote, demo or for an email or phone response, for example), or downloading an offer, such as an eBook or whitepaper.
What is a good conversion value? ›
But what is a good conversion rate? Across industries, the average landing page conversion rate was 2.35%, yet the top 25% are converting at 5.31% or higher. Ideally, you want to break into the top 10% — these are the landing pages with conversion rates of 11.45% or higher.
What is conversion and examples? ›
Conversion is a type of word formation process in which a word is assigned to a new word class or part of speech without any change in form. An example of conversion is an email (noun) changing to a verb; to email.
How does conversion work? ›
A conversion factor is a number used to change one set of units to another, by multiplying or dividing. When a conversion is necessary, the appropriate conversion factor to an equal value must be used. For example, to convert inches to feet, the appropriate conversion value is 12 inches equal 1 foot.
What is an example of a conversion rate? ›
For example, an advertiser runs a campaign with an audience of 20,000 people. Out of that group, 800 people clicked on the ad (ie. converted). To calculate this example, divide 800 by 20,000 to get 0.04, or a 4% conversion rate.
What is type of conversion with example? ›
In computer science, type conversion, type casting, type coercion, and type juggling are different ways of changing an expression from one data type to another. An example would be the conversion of an integer value into a floating point value or its textual representation as a string, and vice versa.
Which one is the example of conversion? ›
Examples of conversion in a Sentence
The company is undergoing a conversion to a new computer system. They have suggested conversion of the old school into apartments. Conversion to gas heating will continue over the next few years. a conversion from Catholicism to Judaism He is thinking about conversion to Buddhism.
What is a conversion strategy example? ›
A conversion strategy is any marketing tactic that helps convert a viewer or customer lead to take the next step with a business. An example could be having a pop-up window appear when a viewer attempts to exit a webpage without taking an action.
To calculate conversion value, multiply the average order value with the conversion rate. This will give you the monetary value generated from each successful conversion on your website.
How to track conversion value? ›
How to track transaction-specific values on a website
- Sign in to your Google Ads account.
- Click the tools icon. ...
- Under “Measurement,” click Conversions.
- Click the name of the website conversion action you want to edit. ...
- Click Edit settings.
- Click Value, then select Use different values for each conversion. ...
- Click Done.
Conversion values help you measure and optimize the true business impact of your ad campaigns more accurately. If you assign values to your conversions, you'll be able to learn the total business value that Google Ads generated, rather than simply the number of conversions that have happened.
What is conversion examples in math? ›
Examples of Conversion Factors
- 1 gallon = 3.78541 liters (volume)
- 1 pound = 16 ounces (mass)
- 1 kilogram = 1,000 grams (mass)
- 1 pound = 453.592 grams (mass)
- 1 minute = 60000 milliseconds (time)
- 1 square mile = 2.58999 square kilometers (area)
