What is Conversion Ratio? A Comprehensive Legal Overview
Definition & Meaning
The conversion ratio refers to the number of common shares that a convertible security can be converted into. This ratio is important for investors as it indicates how many shares they will receive when they convert their security. The conversion ratio is calculated by dividing the face value of the convertible security by the conversion price. A higher conversion ratio means more shares can be exchanged for each convertible security, which can affect the security's market value.
Legal Use & context
The conversion ratio is primarily used in financial and investment law, particularly concerning convertible securities such as bonds or preferred stock. Investors and legal professionals may encounter this term when discussing investment strategies, securities offerings, and corporate finance. Understanding the conversion ratio is essential for making informed investment decisions. Users can manage related legal documents through US Legal Forms, which provides templates for securities transactions and other investment-related agreements.
Real-world examples
Here are a couple of examples of abatement:
For instance, if a convertible bond has a face value of $1,000 and a conversion price of $50, the conversion ratio would be 20. This means the bondholder can convert the bond into 20 shares of common stock.
(hypothetical example) If a company issues a convertible security with a face value of $500 and a conversion price of $25, the conversion ratio would be 20, allowing the holder to receive 20 shares upon conversion.