Conversion Parity Price Calculator
Use this tool to calculate the "Conversion Parity Price" of an underlying stock. This is the theoretical stock price at which the value of the shares received upon conversion would equal the current market value of the convertible instrument (like a bond or preferred stock).
Enter the current market value of the convertible instrument and its conversion ratio.
Enter Convertible Instrument Details
Understanding Conversion Parity Price
What is Conversion Parity Price?
Conversion parity price is a break-even stock price. It tells you what the price of the underlying common stock would need to be for the total market value of the shares you would receive upon converting your convertible bond or preferred stock to equal the current market price of that convertible instrument.
In simpler terms, it's the stock price at which the convertible is "at the money" based on its market value, not its face value.
Conversion Parity Price Formula
The formula is straightforward:
Conversion Parity Price = Market Value of Convertible Instrument / Conversion Ratio
For example, if a convertible bond is trading at $1050 and converts into 20 shares of stock, the parity price is $1050 / 20 = $52.50. If the stock is trading above $52.50, the convertible's value is largely driven by the stock price (conversion value). If the stock is below $52.50, the convertible's value is more influenced by its bond/preferred stock characteristics (investment value).
How it is Used
Investors use the conversion parity price to compare the value of the convertible instrument to the value of its underlying stock. It helps determine if the convertible is trading at a premium or discount to its conversion value based on its current market price. A convertible trading significantly above parity is said to have a high conversion premium.
Conversion Parity Price Examples
Click on an example to see the calculation:
Example 1: Convertible Bond
Scenario: A company's convertible bond is trading at $1,100 and can be converted into 25 shares of common stock.
1. Known Values: Market Value = $1,100, Conversion Ratio = 25 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $1,100 / 25
4. Result: Parity Price = $44.00
Conclusion: The stock price needs to be $44.00 for the 25 shares to be worth $1,100.
Example 2: Convertible Preferred Stock
Scenario: A share of convertible preferred stock is trading at $55 and converts into 2 shares of common stock.
1. Known Values: Market Value = $55, Conversion Ratio = 2 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $55 / 2
4. Result: Parity Price = $27.50
Conclusion: If the common stock trades at $27.50, two shares would be worth $55.
Example 3: Calculating Parity for a Premium
Scenario: A convertible bond (Face Value $1000) is trading at a premium, market value is $1,300. It converts into 50 shares.
1. Known Values: Market Value = $1,300, Conversion Ratio = 50 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $1,300 / 50
4. Result: Parity Price = $26.00
Conclusion: The stock must reach $26.00 for the conversion value to match the bond's $1,300 market price.
Example 4: Calculating Parity when Bond Trades Near Par
Scenario: A convertible bond (Face Value $1000) is trading close to par at $980. It converts into 40 shares.
1. Known Values: Market Value = $980, Conversion Ratio = 40 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $980 / 40
4. Result: Parity Price = $24.50
Conclusion: At a stock price of $24.50, the converted shares would be worth $980.
Example 5: High Conversion Ratio
Scenario: A convertible preferred share trading at $120 converts into 10 shares of stock.
1. Known Values: Market Value = $120, Conversion Ratio = 10 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $120 / 10
4. Result: Parity Price = $12.00
Conclusion: The parity price is $12.00 per share.
Example 6: Low Conversion Ratio
Scenario: A convertible bond trading at $1,030 converts into 8 shares.
1. Known Values: Market Value = $1,030, Conversion Ratio = 8 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $1,030 / 8
4. Result: Parity Price = $128.75
Conclusion: A higher stock price of $128.75 is needed due to the lower conversion ratio.
Example 7: Convertible Trading Below Par
Scenario: A convertible bond (Face Value $1000) is trading below par at $850. It converts into 30 shares.
1. Known Values: Market Value = $850, Conversion Ratio = 30 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $850 / 30
4. Result: Parity Price ≈ $28.33
Conclusion: The parity price is approximately $28.33.
Example 8: Convertible Preferred at a Discount
Scenario: A convertible preferred share (Issue Price $100) is trading at $95. It converts into 4 shares.
1. Known Values: Market Value = $95, Conversion Ratio = 4 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $95 / 4
4. Result: Parity Price = $23.75
Conclusion: The parity price for the stock is $23.75.
Example 9: Fractional Conversion Ratio
Scenario: A convertible instrument is trading at $250 and converts into 5.5 shares.
1. Known Values: Market Value = $250, Conversion Ratio = 5.5 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $250 / 5.5
4. Result: Parity Price ≈ $45.45
Conclusion: The parity price is approximately $45.45 per share.
Example 10: High Market Value, High Ratio
Scenario: A convertible bond trading at $1,500 converts into 60 shares.
1. Known Values: Market Value = $1,500, Conversion Ratio = 60 shares.
2. Formula: Parity Price = Market Value / Conversion Ratio
3. Calculation: Parity Price = $1,500 / 60
4. Result: Parity Price = $25.00
Conclusion: The parity price is $25.00 per share.
Frequently Asked Questions about Conversion Parity Price
1. What is Conversion Parity Price?
It's the stock price level where the current market value of a convertible instrument (bond or preferred stock) is equal to the market value of the shares you would receive if you converted it immediately.
2. How is it calculated?
It's calculated by dividing the current market value of the convertible instrument by its conversion ratio (the number of shares you get per convertible).
3. Why is it important?
It helps investors understand the relationship between the convertible's market price and the underlying stock's price. It's a key metric for assessing the conversion premium.
4. What is the Conversion Ratio?
The conversion ratio specifies how many shares of the underlying common stock an investor receives for each convertible bond or preferred share they convert.
5. What is Conversion Premium?
Conversion premium is the amount by which the market price of a convertible security exceeds its conversion value. It is often expressed as a percentage: [(Convertible Market Price - Conversion Value) / Conversion Value] * 100%.
6. How does the parity price relate to the conversion value?
The conversion value is the current market value of the shares into which the convertible can be converted (Conversion Ratio * Current Stock Price). The parity price is the *stock price* where the conversion value *would equal* the convertible's *market price*. They are related concepts used to analyze the convertible.
7. Does the face value of a convertible bond matter for parity price?
No, the parity price calculation uses the *market value* of the convertible instrument, not its face value or par value. The face value is relevant for calculating the bond's investment value or yield, but not directly for parity price.
8. What does it mean if the stock price is above the parity price?
If the current stock price is higher than the calculated conversion parity price, it means the value of the converted shares (conversion value) is greater than the current market value of the convertible instrument. This suggests the convertible is trading at a discount to its conversion value, or potentially indicates arbitrage opportunities (though complex).
9. What does it mean if the stock price is below the parity price?
If the current stock price is lower than the calculated conversion parity price, it means the value of the converted shares (conversion value) is less than the current market value of the convertible instrument. This indicates the convertible is trading at a premium to its conversion value. Its market price is being supported more by its value as a bond or preferred stock.
10. Can the Conversion Ratio change?
Yes, convertible instruments often have provisions for adjustment to the conversion ratio under certain events, such as stock splits, stock dividends, or other capital changes by the issuing company. Always use the current, adjusted conversion ratio.
