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Simple English definitions for legal terms
conversion ratio
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A quick definition of conversion ratio:
Conversion Ratio: The conversion ratio is a number that tells us how many common shares can be obtained by converting a convertible security. It is also the ratio of the face value of the convertible security to the conversion price. In simpler terms, it is the amount of shares you get when you convert a security and how much it is worth compared to the price you paid for it.
A more thorough explanation:
Definition: Conversion ratio refers to the number of common shares that can be obtained by converting a convertible security. It is also the ratio of the face value of the convertible security to the conversion price.
Example: If a convertible bond has a face value of $1,000 and a conversion price of $50, the conversion ratio would be 20 ($1,000 ÷ $50 = 20). This means that each bond can be converted into 20 common shares of the company.
Another example would be a convertible preferred stock with a face value of $500 and a conversion price of $25. The conversion ratio would be 20 ($500 ÷ $25 = 20), which means that each preferred stock can be converted into 20 common shares of the company.
The conversion ratio is an important factor to consider when investing in convertible securities. It determines the number of common shares that an investor can obtain by converting the security, which can affect the potential return on investment.