How Adjustment in Conversion Terms Work

When there is a change in a convertible security's conversion price, you can consider that as an adjustment in the conversion term. As a holder of a convertible security, the conversion price is the amount you pay to swap it for a common share. The price per share dips after a stock split, for example. As a result, there will be an adjustment in the conversion terms to reflect the change in the value of a share.

You should note that regardless of whether or not a stock split happens, some convertible instruments include variations in conversion terms embedded into the terms of the instrument. As the holder of a convertible security, you can be unaffected by a change in conversion terms, which can be a scheduled event or depend on other circumstances.

The firm must compute the adjusted conversion price when they adjust according to the officer's certificate, which specifies the facts on which the conversion price modification is based. The issuing business will normally issue a notice of the new price to you as a shareholder via first-class mail in the case of a conversion adjustment.

Example of Adjustment in Conversion Terms

As an example, if the convertible security for your company (let's call it Icon CBD) has an exchange privilege of one share of common stock for $100 and Icon CBD's common stock splits 2 for 1, the exchange ratio is modified to one common share for $50. Now, this split implies that one share of common stock is no longer $100 but is now $50.

Here you can see the adjustment results from a 2 for 1 stock split, and this adjustment shows in the new price per stock. Your company's existing shareholders will experience dilution because the business has issued new shares. However, anti-dilution safeguards, which modify the conversion ratio to offset the effect of dilution through fresh issuances, are quite common.

Adjustment in Conversion Terms vs. Conversion Price

The conversion price is the cost at which you, the owner of a convertible security, can acquire an equal number of common shares in return for trading in your convertible security. You can determine this price at the time you sell the convertible security. For example, your company may purchase an issue of convertible bonds (which is a low-risk investment) from ABC company with the understanding that if the ABC's stock appreciates significantly, your company will be able to trade its bonds for the claim to a certain amount of the ABC's stocks at a set, low price. This is the cost of conversion.

On the other hand, an adjustment in conversion term has to do with changes that a company will make to reflect the new value of each stock after a stock spilt. While a conversion price is restricted to the financial implications of your transaction, the adjustment in conversion term shows changes that affect your stock when other factors are at play.