Some companies issue bonds or preferred stock that is convertible, at some future time, to common stock. At time of issue, the conversion relationship is usually defined as either a ratio or a price. If defined as a price, the ratio can be calculated using the par value of the convertible security and the defined price of the common stock.
Calculating Conversion Ratio
Read the indenture -- the documents that define the terms of the convertible -- for either the conversion ratio or the conversion price. If the ratio is not specified, use the conversion price to calculate the conversion ratio. Divide the nominal value of the security by the conversion price. For instance, if the nominal value is $1,000 and the conversion price is $40, the conversion ratio is 25 or 25:1.
- kieferpix/iStock/Getty Images