Hong Life CalculatorsUnderstanding the convertible note and bond conversion calculator — concept and principle
A convertible note or bond is debt that can be exchanged for the issuer's shares at a preset conversion price. This calculator shows how many shares a conversion creates, the conversion ratio per 1,000 of face value, what those shares are worth at today's market price, and how the conversion price compares with that price. It works with any currency.
How it is calculated
Shares issued = (face value converted + accrued interest converted) ÷ conversion price
Conversion ratio per 1,000 face = 1,000 ÷ conversion price
Conversion value = shares issued × current share price
Conversion premium/discount = (conversion price ÷ current share price − 1) × 100
- Accrued interest converted: interest that converts into shares instead of being paid in cash, if the terms allow it (common in startup convertible notes). Enter 0 if it does not convert.
- The result is displayed as a whole number of shares.
The principle
The conversion price is the price per share at which the debt "buys" stock. Dividing the amount converted by that price gives the number of new shares. The holder gains when the market price is above the conversion price, because shares bought at 25 are worth 32. The premium compares the two prices: positive means the conversion price is above the market (converting now would be unattractive), negative means below the market (the conversion is "in the money").
Worked example
- Amount converted: $1,000,000 + $50,000 = $1,050,000.
- Shares issued: $1,050,000 ÷ $25 = 42,000.
- Conversion ratio: 1,000 ÷ 25 = 40 shares per 1,000 of face value.
- Conversion value: 42,000 × $32 = $1,344,000.00.
- Premium/discount: (25 ÷ 32 − 1) × 100 = −21.875%, shown as −21.87%.
How to read the result
Here the shares are worth $1,344,000 against $1,050,000 of debt converted, about 28% more, so conversion is attractive to the holder. For existing shareholders, the 42,000 new shares are the dilution; divide them by the total shares after conversion to see the ownership given up. A conversion premium at issue is normal for listed convertible bonds, since investors accept a higher conversion price in exchange for the bond's downside protection.
Common mistakes
- Forgetting accrued interest when the terms convert it into shares.
- Ignoring valuation caps or discounts in startup notes, which can set a lower conversion price than the headline.
- Confusing the conversion ratio with the number of shares for the whole issue.
Frequently asked questions
What does a negative conversion premium mean?
The conversion price is below the current share price, so each converted share is worth more than it costs.
How is dilution calculated?
New shares ÷ (existing shares + new shares). For example, 42,000 new shares on 958,000 existing shares is 4.2% of the enlarged company.
Sources: Hull, J. C., Options, Futures, and Other Derivatives (Pearson) — convertible bonds · Fabozzi, F. J., Bond Markets, Analysis, and Strategies (Pearson)