The Conversion Parity Price Calculator helps investors and analysts determine the implied stock price when converting a convertible bond into shares. It bridges the relationship between the bond's market price and the equivalent value of the stock it can be converted into. This tool is essential for evaluating the relative value of convertible securities in investment decision-making.
Formula of Conversion Parity Price Calculator
The formula for calculating the conversion parity price is:
Detailed Formula Components
- Convertible Bond Price:
- The current market price of the convertible bond, usually expressed in monetary units such as dollars.
- Conversion Ratio:
- The number of shares that can be obtain by converting one bond. It is calculate as:
Conversion Ratio = Par Value of Bond / Conversion Price- Par Value of Bond: The face value of the bond, typically a fixed amount (e.g., $1,000).
- Conversion Price: The predetermine price at which the bond can be convert into stock.
- The number of shares that can be obtain by converting one bond. It is calculate as:
- Conversion Parity Price:
- The resulting stock price imply by the convertible bond's value, giving insight into whether the bond is overvalue or undervalue relative to the underlying stock.
General Terms Table
Below is a quick reference table showcasing conversion parity price calculations for different scenarios:
| Convertible Bond Price ($) | Par Value of Bond ($) | Conversion Price ($) | Conversion Ratio | Conversion Parity Price ($) |
|---|---|---|---|---|
| 1,200 | 1,000 | 50 | 20 | 60 |
| 1,500 | 1,000 | 40 | 25 | 60 |
| 900 | 1,000 | 100 | 10 | 90 |
| 1,800 | 1,000 | 25 | 40 | 45 |
| 2,000 | 1,000 | 20 | 50 | 40 |
Example of Conversion Parity Price Calculator
Let’s calculate the conversion parity price for a convertible bond:
- Given:
- Convertible Bond Price = $1,200
- Par Value of Bond = $1,000
- Conversion Price = $50
- Step 1: Calculate the Conversion Ratio
Conversion Ratio = Par Value of Bond / Conversion Price
Conversion Ratio = $1,000 / $50 = 20 - Step 2: Calculate the Conversion Parity Price
Conversion Parity Price = Convertible Bond Price / Conversion Ratio
Conversion Parity Price = $1,200 / 20 = $60
Result:
The conversion parity price is $60 per share.
FAQs
This calculator determines the equivalent stock price for a convertible bond, helping investors assess whether the bond or underlying stock offers better value.
The conversion ratio represents how many shares one bond can convert into. It directly impacts the parity price by dividing the bond's market price.
The conversion parity price aids in comparing the bond's value to the stock's current market price, ensuring informed decisions about conversions or investments.