A convertible bond’s market price is watched against what converting it into stock right now would actually be worth — the gap between the two is the conversion premium.
How it works
Multiplying the fixed conversion ratio by the current stock price gives the conversion value; comparing the bond’s actual market price against that value, as a percentage, gives the conversion premium.
What this does not include
This does not include the bond’s separate “investment value” (what it would be worth as a plain non-convertible bond based on its coupon and credit quality) — the bond’s actual market price reflects the greater of investment value and conversion value, plus an option premium for the conversion right itself.
How to use this calculator
- Enter the conversion ratio, current stock price, and bond market price.
Frequently asked questions
Why would a convertible bond trade above its conversion value?
Because holders retain optionality — they can wait for the stock to rise further before converting, and that option to wait has real value, priced into the premium.
What happens to the conversion premium as the stock price rises a lot?
It typically shrinks toward zero — deep in-the-money convertibles trade very close to their conversion value, since the option-to-wait value becomes small relative to the now-large conversion value itself.
Is a negative conversion premium common?
It’s unusual in liquid markets, since it would represent a pure arbitrage (buy the bond, convert, sell the stock for an immediate profit) — but it can appear briefly in illiquid or fast-moving markets.
