Conversion Premium

A convertible bond is a hybrid.

Like a liger. A liger is a cross between a lion and a tiger...and a convertible bond is a cross between a bond and shares of stock.

A convertible bond starts off as a bond. It has a yield and a maturity. But the security contains an option to convert the bond into a certain number of shares at a certain price. So if the stock price doesn't do much, you can leave it as a bond and earn interest. However, if the stock price rises above the conversion price, you can trade the bond in for shares of stock and make money there. Best of both worlds.

The conversion premium represents the potential profit from converting the bond into stock. Simply subtract the conversion price of the shares from the current market price of the stock. That's the conversion premium. (If the current market price sits below the conversion price, there is no conversion premium.)