{"id":17626,"date":"2021-07-12T15:13:31","date_gmt":"2021-07-12T15:13:31","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17626"},"modified":"2026-06-01T16:48:44","modified_gmt":"2026-06-01T16:48:44","slug":"describe-defining-features-of-a-convertible-bond","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-defining-features-of-a-convertible-bond\/","title":{"rendered":"Features of a Convertible Bond"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"What is the conversion price of a convertible bond issued at $800 with a conversion ratio of 15 shares?\",\n    \"text\": \"A company issues a convertible bond at $800 with a face value of $1,000 and annual coupon payments of 6%. The bond can be converted into 15 common shares. The market price of the convertible bond is $700. The conversion price of the bond is closest to: A. $2.67. B. $40.00. C. $53.33.\",\n    \"answerCount\": 3,\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"A. $2.67.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"B. $40.00.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"C. $53.33.\"\n      }\n    ],\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C. The conversion price is calculated as the issue price divided by the conversion ratio. Conversion Price = $800 \u00f7 15 = $53.33. Therefore, the conversion price of the bond is approximately $53.33 per share.\"\n    },\n    \"author\": {\n      \"@type\": \"Organization\",\n      \"name\": \"AnalystPrep\"\n    }\n  }\n}\n<\/script><\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/5zZuTYmjxW8\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>A <strong><em>convertible bond<\/em><\/strong> is a hybrid instrument with a conversion option that gives the owner the right to convert debt into equity during a predetermined period (conversion period) at a predetermined price (conversion price).<\/p>\n<p>Investors can participate in the potential upside through the conversion mechanism while protecting the downside with cashflows from the coupon payments and the face value at maturity.<\/p>\n<p>The <em><strong>conversion price<\/strong><\/em> and <em><strong>conversion ratio<\/strong><\/em> characterize a convertible bond. The conversion price is the share price at which bondholders can convert their bonds into common shares. On the other hand, the number of common shares that the bondholder gets from converting the bond into common shares is called the conversion ratio.<\/p>\n<p>$$ \\text{Conversion ratio} =\\frac{\\text{Issue price}}{\\text{Conversion price}} $$<\/p>\n<div style=\"margin: 18px 0;\"><a style=\"display: block; text-align: center; padding: 14px 18px; border: 2px solid #2F5BFF; border-radius: 18px; color: #ffffff; font-weight: 600; font-size: 16px; text-decoration: none; background-color: #1a73e8;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\">Strengthen your CFA Level II convertible bond concepts with our Free Trial.<\/a><\/div>\n<h4>Example: Conversion Price<\/h4>\n<p>The following information relates to a convertible bond issued by XYZ Inc.<\/p>\n<p>$$ \\begin{array}{c|c} \\text{Issue date} &amp; {01 \\text{ July } 2020} \\\\ \\hline \\text{Maturity date} &amp; {30 \\text{ June } 2024} \\\\ \\hline \\text{Interest rate} &amp; 5.00\\% \\\\\u00a0 \\hline \\text{Issue size} &amp; 1,000,000 \\\\ \\hline \\text{Issue price} &amp; $100 \\\\\u00a0 \\hline \\text{Conversion ratio} &amp; 2.58 \\\\ \\end{array} $$<\/p>\n<p>The conversion price of the bond is <em>closest<\/em> to:<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>$$ \\begin{align*} \\text{Conversion ratio} &amp; =\\frac{\\text{Issue price}}{\\text{Conversion price}} \\\\ \\\\ 2.58 &amp;=\\frac{100}{\\text{Conversion price}} \\\\ \\\\ \\text{Conversion price}&amp; =\\frac{100}{2.58} =$38.76 \\end{align*} $$<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>A company issues a convertible bond at $800 with a face value of $1,000, which pays 6% annual coupons. The bond can be converted to 15 common shares, which are traded at  per share. <a href=\"https:\/\/www.colombia.co\/modafinil-over-the-counter\/\">https:\/\/www.colombia.co\/<\/a>  The market price of the convertible bond is $700.<\/p>\n<p>The conversion price of the bond is <em>closest to<\/em>:<\/p>\n<ol type=\"A\">\n<li>$2.67.<\/li>\n<li>$40.00.<\/li>\n<li>$53.33.<\/li>\n<\/ol>\n<h4><strong>Solution<\/strong><\/h4>\n<p><strong>The correct answer is C.<\/strong><\/p>\n<p>$$ \\begin{align*} \\text{Conversion price}&amp; =\\frac{\\text{Issue price}}{\\text{Conversion price}} \\\\ \\\\ \\text{Conversion ratio} &amp;=\\frac{800}{15}=$53.33 \\end{align*} $$<\/p>\n<\/blockquote>\n<p>Reading 30: Valuation and Analysis of Bonds with Embedded Options<\/p>\n<p><em>LOS 30 (n) Describe defining features of a convertible bond.<\/em><\/p>\n<div style=\"text-align: center; margin: 30px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a><\/p>\n<p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">Access CFA Level II fixed income study notes, practice questions, mock exams, and video lessons to strengthen your understanding of convertible bond features, valuation, and embedded options.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A convertible bond is a hybrid instrument with a conversion option that gives the owner the right to convert debt into equity during a predetermined period (conversion period) at a predetermined price (conversion price). Investors can participate in the potential&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,472],"tags":[],"class_list":["post-17626","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-fixed-income","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Convertible Bond Features | AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn the key features of convertible bonds, including conversion prices, conversion ratios, and embedded conversion options.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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