Listen to a Business English Dialogue About Conversion ratio
Claire: Hi Taylor, do you know what a conversion ratio is in finance?
Taylor: Yes, I think it’s the number of shares of common stock that can be obtained by converting a convertible security, like a bond or preferred stock.
Claire: That’s right. The conversion ratio determines how many shares an investor can receive upon exercising the conversion option.
Taylor: How is the conversion ratio calculated?
Claire: It’s typically set when the convertible security is issued and is based on a predetermined formula specified in the security’s terms.
Taylor: Does the conversion ratio change over time?
Claire: No, once it’s set, the conversion ratio remains constant throughout the life of the convertible security.
Taylor: What happens if the stock price increases above the conversion price?
Claire: In that case, the investor might choose to convert their convertible security into common stock to benefit from the higher stock price.
Taylor: Are there any risks associated with conversion ratios?
Claire: One risk is that if the stock price doesn’t reach or exceed the conversion price, the investor might not find it advantageous to convert their security.
Taylor: Thanks for explaining, Claire. Conversion ratios seem like an important factor for investors to consider.
Claire: No problem, Taylor. It’s essential to understand how conversion ratios work when investing in convertible securities.