Financial Management · The valuation of debt and other financial assets

Convertible Bond Valuation: Floor Value and Conversion Value

Updated 11 October 2026 · Fact-checked

Convertible bond valuation compares two values. The floor value is the present value of interest and redemption at the yield on similar straight debt. The conversion value is the expected future share price multiplied by the number of shares per bond. The bond is worth at least the floor value, and holders convert if conversion value is higher.

Understand Convertible Debt Valuation

A convertible bond (or convertible loan stock) is debt that pays interest like a normal bond. On set future dates the holder may swap it for a fixed number of ordinary shares instead of taking the cash redemption. That right is called the conversion option.

Because of this option, a convertible bond has two possible values. One is what it is worth as ordinary debt. The other is what it is worth if turned into shares. The holder gets the better of the two at the conversion date, so the market price is driven by both.

The floor value is the value as straight debt. You discount the interest and the redemption payment at the yield on similar non-convertible debt (the investor's required return). The bond should not trade below this, because the holder could always keep it and take the cash.

The conversion value is what the shares received would be worth. It is the share price at the conversion date × the conversion ratio (shares per bond). Exam questions give a current share price and a growth rate, so you must grow the price to the conversion date first.

The conversion premium is how much more you pay for the bond than the value of the shares you would get today. A positive premium is normal. You pay it for the downside protection of the floor and the chance of share price growth.

Key rules to remember

Floor value: Floor value = Σ [interest ÷ (1 + r)^t] + redemption value ÷ (1 + r)^n; r is the pre-tax yield on similar straight debt, not the coupon rate. Use annuity and discount factor tables.
Conversion ratio: Conversion ratio = nominal value of bond ÷ conversion price; Often given directly, for example 30 shares per $100 bond.
Future share price: Future share price = current share price × (1 + g)^n; g is the expected annual share price growth. n is the years to the conversion date.
Conversion value (future): Conversion value = future share price × conversion ratio; Compare this with the cash redemption value at the same date. The holder takes the higher.
Current conversion value: Current conversion value = current share price × conversion ratio; Used as the base for the conversion premium.
Expected market value of the bond: Value = Σ [interest ÷ (1 + r)^t] + higher of (conversion value, redemption value) ÷ (1 + r)^n; Discount at the straight-debt yield. If the answer is below the floor value, the floor value is the better estimate.
Conversion premium: Premium per share = (market price of bond ÷ conversion ratio) − current share price; Per bond premium = market price − current conversion value. Percentage premium = premium ÷ current conversion value.

How to solve Convertible Debt Valuation questions

Use this order for any question on convertible bond valuation. It works whether you are asked for floor value, conversion value, market value or premium.

1Write down the facts: nominal value, coupon, redemption terms, conversion ratio, conversion date, current share price and share price growth.
2Find the discount rate. Use the yield on similar straight debt for valuation. Do not use the coupon rate or the cost of equity unless the question says so.
3Calculate the floor value: PV of the interest plus PV of the redemption value at that rate.
4Grow the share price to the conversion date, then multiply by the conversion ratio to get the future conversion value.
5Compare the future conversion value with the cash redemption value. The holder converts only if conversion value is higher. Use the higher figure as the final payment.
6If asked for the expected market value, discount the interest and the higher final payment at the straight-debt yield. Check it is not below the floor value.
7If asked for the premium, compare the market price with the current conversion value (current share price × conversion ratio). Give it per bond, per share or as a percentage, as asked.
8State your conclusion in words: whether holders will convert, and how the market value compares with floor value.

Quickest way: Two-number comparison

When to use it: Use this in Section A or Section B objective test questions, where you need one value or one decision quickly.

Compute the floor value first. It needs only two table factors and gives a safe minimum.
Compute the future conversion value in one chain: current price × (1 + g)^n × ratio.
Compare it with the redemption value. Higher wins. This answers every convert or redeem question.
For premium questions, compute current share price × ratio and subtract from the bond market price. Do not grow the price.
Before choosing an option, check that your answer is in the right range: market value should not be below the floor value.

Common mistakes in Convertible Debt Valuation

Discounting the interest and redemption at the coupon rate to get the floor value.
Students link the bond's own coupon with its value. At the coupon rate the bond would simply be worth par.
Fix: Use the yield on similar straight debt. Read the question for a market yield or the cost of the company's non-convertible debt.
Using the current share price to compute the conversion value at a future date.
The growth rate is easy to overlook in a long question.
Fix: Always ask: at which date? For a future conversion value, grow the price by (1 + g)^n.
Growing the share price when calculating the conversion premium.
Students mix up the current premium with the future conversion decision.
Fix: The premium compares today's bond price with today's conversion value. Use the current share price only.
Assuming the holder always converts.
Students focus on the conversion option and forget the cash redemption alternative.
Fix: Compare conversion value with redemption value at the conversion date. Take the higher. If shares are worth less, the holder redeems.
Using the wrong number of shares or forgetting the conversion ratio.
The question may give a conversion price rather than a ratio.
Fix: If given a conversion price, divide the nominal value by it. For example, $100 ÷ $4 = 25 shares.
Treating the premium over floor value as the conversion premium.
Both are called premiums in loose speech.
Fix: The conversion premium is measured against conversion value. The excess over floor value is a separate comparison. Label each clearly.

Worked examples

Example 1

A company has 6% convertible bonds with a nominal value of $100. They are redeemable at par in 5 years, or the holder may convert each bond into 30 ordinary shares at that date. The current share price is $3.00 and is expected to grow at 5% a year. Similar straight debt yields 8%. Calculate (a) the floor value, (b) the conversion value in 5 years and whether holders will convert, and (c) the expected market value of the bond today. Use an annuity factor of 3.993 and a discount factor of 0.681 for 5 years at 8%.

Show the solution

(a) Interest PV: $6 × 3.993 = $23.96 (rounded from 23.958).
Redemption PV: $100 × 0.681 = $68.10.
Floor value = 23.96 + 68.10 = $92.06 (23.958 + 68.10 = 92.058).
(b) Share price in 5 years = $3.00 × 1.05^5 = $3.00 × 1.2763 = $3.83 (3.8288 unrounded).
Conversion value = 3.8288 × 30 = $114.87.
This exceeds the $100 redemption value, so holders will convert.
(c) PV of the conversion value = 114.87 × 0.681 = $78.23 (78.2265 unrounded).
Expected market value = 23.958 + 78.2265 = $102.18.
This is above the floor value of $92.06, so $102.18 is the better estimate.

Answer: Floor value $92.06. Conversion value in 5 years $114.87, so holders convert. Expected market value today about $102.18.

Example 2

A $100 convertible bond pays 4% interest and is redeemable at par in 3 years, or convertible into 20 shares. The bond trades at $95. The current share price is $4.50, expected to grow at 6% a year. Straight debt of similar risk yields 7%. Calculate (a) the floor value, (b) the current conversion value and the conversion premium per bond, per share and as a percentage, and (c) whether holders will convert in 3 years. Use an annuity factor of 2.624 and a discount factor of 0.816 for 3 years at 7%.

Show the solution

(a) Interest PV: $4 × 2.624 = $10.50 (10.496 unrounded).
Redemption PV: $100 × 0.816 = $81.60.
Floor value = 10.496 + 81.60 = $92.10. The bond trades at $95, which is above the floor.
(b) Current conversion value = $4.50 × 20 = $90.00.
Premium per bond = 95 − 90 = $5.00.
Premium per share = 5.00 ÷ 20 = $0.25 (equivalently 95 ÷ 20 = 4.75 less 4.50).
Percentage premium = 5 ÷ 90 = 5.6%.
(c) Share price in 3 years = 4.50 × 1.06^3 = 4.50 × 1.191016 = $5.36.
Conversion value = 5.3596 × 20 = $107.19.
This exceeds the $100 redemption value, so holders will convert.

Answer: Floor value $92.10. Current conversion value $90.00. Premium $5.00 per bond, $0.25 per share, 5.6%. Holders will convert, as conversion value $107.19 exceeds $100.

Exam tips

Read the question for the date of conversion and the growth rate. Most lost marks come from using the wrong share price.
Label every figure: floor value, conversion value, premium. In Section C, a clear label earns method marks even if one number is wrong.
In objective questions, calculate both floor and conversion values before choosing. Distractors are often the other value or the coupon-rate version.
Show the comparison with the redemption value and state the decision in a sentence. Examiners ask for the holder's action.
Use the discount factors given in the exam tables. Small rounding differences will not matter, but keep at least two decimal places in the working.

Practice questions from The valuation of debt and other financial assets

Convertible Debt Valuation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Convertible Debt Valuation: frequently asked questions

What is the difference between floor value and conversion value?

Floor value is what the bond is worth as ordinary debt. It is the present value of interest and redemption at the straight-debt yield. Conversion value is what the shares received on conversion are worth: share price × conversion ratio. The market price is usually above both.

How do you calculate the conversion premium?

Subtract the current conversion value from the bond's market price. Current conversion value is the current share price × the conversion ratio. Divide by the ratio for the premium per share, or by the conversion value for a percentage.

Which discount rate do I use for the floor value?

Use the yield on similar non-convertible debt, which is the return investors require without the conversion option. Do not use the coupon rate. Do not use the cost of equity.

When will bondholders convert?

They convert when the conversion value at the conversion date is higher than the cash redemption value. If the shares are worth less, they take the redemption payment. The comparison is made at the conversion date, using the grown share price.