So I know how the get the original market conversion price as par over conversion ratio given. But if we need to tell if it is in the money a year after issuance, I know we need to compare the market value of the stock to the market conversion price, correct? How do you calculate the market conversion price- isn’t it full MV of convertible/conversion ratio? Why do we use par in the first calculation above but market value in the second?
What is the point of calculating market conversion price?
thanks
Conversion price is current bond value / conversion ratio. You compare that to the current stock price. If they are far apart, it is deep out of the money and behaves bond-like. If it is close to conversion price, its hybrid and if its well above stock price, it basically behaves like a stock.
Conversion price tells you at what stock price you can convert, therefore, as the value of the “underlying” (the bond) changes, the conversion price also changes.
Not sure if I made myself clear
I think this helps. thanks!