Legal Definitions - conversion premium

Definition: Conversion premium refers to the amount by which a security is sold above its conversion price.

Example: Suppose a company issues convertible bonds with a face value of $1,000 and a conversion price of $50 per share. If the market price of the company's common stock is $60 per share, the conversion premium would be $10 per share or 20% ($60 - $50 = $10).

The example illustrates that investors are willing to pay a premium to convert their bonds into common stock because they believe that the stock price will continue to rise in the future. The conversion premium reflects the market's expectation of the stock's future performance.