Define: Conversion Ratio

A conversion ratio is a financial term that represents the number of common shares an investor will receive for each convertible security they hold.

The conversion ratio is typically determined at the time of issuance of the convertible security and is based on a predetermined formula specified in the security’s terms.

In some cases, the conversion ratio may be subject to adjustment based on certain events, such as stock splits, stock dividends, or other corporate actions. However, any changes to the conversion ratio must be clearly stated in the security’s terms.

The conversion ratio is important as it determines the number of common shares an investor will receive upon conversion of their convertible security. It helps investors assess the potential value and return on their investment.

The conversion ratio can impact the value of a convertible security. Generally, a lower conversion ratio means the security is more valuable, as it allows the investor to convert at a more favourable price per share.

In certain circumstances, the issuer may have the right to adjust the conversion ratio. However, such adjustments must be made in accordance with the terms specified in the security’s offering documents and must be fair and equitable to the investors.

In some cases, the conversion ratio may be subject to negotiation between the issuer and the investor. However, the final conversion ratio must be agreed upon and documented in the convertible security’s terms.

To calculate the number of common shares, multiply the conversion ratio by the number of convertible securities you hold. The resulting number represents the total number of common shares you will receive upon conversion.

Generally, the conversion ratio is fixed at the time of issuance and cannot be unilaterally changed by either the issuer or the investor. Any changes to the conversion ratio after issuance would require the consent of both parties and must be documented in an amendment to the security’s terms.