Chartered Financial Analyst (CFA) Practice Exam Level 2

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What factor is NOT considered in calculating the conversion ratio of a convertible bond?

Par Value of the bond
Conversion Price of the bond
Market Price of the bond
Outstanding shares of the issuing company

The correct answer is: Outstanding shares of the issuing company

The calculation of the conversion ratio of a convertible bond specifically involves the par value of the bond and the conversion price. The conversion ratio determines how many shares of the issuing company's common stock a bondholder will receive for each bond they convert. To derive the conversion ratio, you take the par value of the bond and divide it by the conversion price. This relationship indicates how many shares will be given for the investment represented by the bond. The market price of the bond may influence investment decisions and valuation but does not play a direct role in the computation of the conversion ratio itself. Similarly, the number of outstanding shares of the issuing company could affect the overall capital structure and market perceptions but is irrelevant to the calculation of the conversion ratio. Hence, the outstanding shares of the issuing company are not a factor considered in calculating the conversion ratio, making this the correct distinction.