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The Value of Convertible Bonds as Stock
The value of convertible security as stock depends on the prices of common stocks in the market. By using the conversion equation the value of convertible bond is the number of shares that correspond to the conversion multiplied by the price of stock in the market.
If stocks market prices are increasing the value of convertibles is also increasing. The value of convertibles is obtained by multiplying the conversion ration times the stocks market price.
When common stocks’ prices is below the conversion price, the value of convertibles will be lower than the face value amount of the bond ($1,000). When the price of the stock is higher than the conversion price, the value of convertibles will be higher than the face value of the bond. Thus, the conversion feature allows for the upside potential of capital gains through appreciation of the stock price. Moreover, there is a floor price to avoid prices of convertibles drop beyond its straight value.
For example, let’s imagine that market prices of common stocks drop to $10 per share. The conversion price is $400, but the market prices will not drop below the value of the bond owing to the value of the coupon interest payments on the bond. Equally, The market price of convertibles will not be lower than the value of conversion security. This is due to in part to the activity of argitrageurs who buy and sell the same security in the different markets to take advantages of price differentials.