Convertible bond: Conversion ratio, Market conversion price, Market conversion premium per share, and Premium payback period

Convertible bonds

Par value		$1,000
Conversion price		$55.56
Market price		$947
Coupon rate		7.25%

Stock (underlying of the convertible bond above)

Price		$50.00
Dividends per share		$1.80

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Conversion ratio = Par value / Conversion price = $1,000 / $55.56 = 18

Market conversion price = Market price (CB) / Conversion ratio = $947 / 18 = $52.61

Market conversion premium per share = Market conversion price - Market price (underlying stock) = $52.61 - $50.00 = $2.61


Premium payback period(*) = (Market conversion premium per share)/(Favorable income differential per share)
(*) How many years it would take to recover the premium per share

Favorable income differential per share = (Coupon rate * Par value - (Conversion ratio * Dividends per share))/Conversion ratio = (Coupon rate * Par value)/Conversion ratio - Dividends per share = (7.25% * $1,000)/18 - $1.80 = $2.23

Premium payback period = $2.61/$2.23 = 1.17 years