Conversion Parity Price

You buy a convertible bond for a company that makes razor wire, because that’s something that people want for Christmas, for some reason..

You give it to your wife. Eh...the bond, that is. This bond is worth $1,000, and it's convertible for 50 shares of stock in the razor wire company.

Let's say the stock is trading at $15 per share. You wouldn't want your wife to convert that bond to stock, since it would only give her 50 shares worth $750 in total. At the minimum, she should want to sell the bond when the stock is trading at $20. That’s because she would get 50 shares worth $20 each at the price of the bond = $1,000.

That threshold, where the price of the bond is equal to the price of shares times the redeemable number of shares...is called the conversion parity price.