Conversion premium

Three numbers describe the conversion terms and they are all the same fact viewed differently. The conversion price is the effective price at which shares are handed over. The conversion ratio is the number of shares each bond becomes, which is the bond's nominal amount divided by the conversion price. The conversion premium is how far the conversion price sits above the share price at pricing, expressed as a percentage.

The premium is the lever the bookrunner pulls against the coupon. Setting it higher moves the embedded call further out of the money, so the option is worth less, so the coupon has to rise to keep the bond saleable. Setting it lower makes the option more valuable and pulls the coupon down, at the price of agreeing to sell equity nearer to today's level. Every convertible is a negotiated point on that trade off, and the two numbers should always be read together.

Parity, sometimes called conversion value, is the conversion ratio multiplied by the current share price. It is what the bond would be worth if converted today, and it is the floor the bond price approaches from above as the shares rise. Below parity sits the bond floor, the value of the straight debt alone, which is what supports the price when the shares fall.

The number does not move with the share price, but it can be adjusted. Anti dilution provisions reset the conversion price on share splits, rights issues and some distributions, so the holder is not diluted by a corporate action they had no say in. Those provisions are negotiated, and how generous they are is a real point of difference between deals.