Going back to the Lufthansa convertible bonds, Lufthansa raised €600 million by issuing convertible subordinated debentures with a 2 percent coupon rate due in 2025. Each bond had a par value of €100,000 and was convertible into 7,716.049 shares of Lufthansa common stock any time before maturity. The number of shares received for each bond (7,716.049 in this example) is called the conversion ratio.

Bond traders also speak of the conversion price of the bond. This price is calculated as the ratio of the face value of the bond to the conversion ratio. Because the face value of each Lufthansa bond was €100,000, the conversion price was €12.96 (= €100,000/7,716.049). If a bondholder chose to convert, she would give up a bond with a face value of €100,000 and receive 7,716.049 shares of Lufthansa common stock in return. The conversion is equivalent to paying €12.96 for each share of Lufthansa common stock received.

When Lufthansa issued its convertible bonds, its common stock was trading at €9.25 per share. The conversion price of €12.96 was 40 percent higher than the actual common stock price. This 40 percent is referred to as the conversion premium. It reflects the fact that the conversion option in Lufthansa convertible bonds was out of the money, meaning that immediate conversion would be unprofitable. This conversion premium is typical.

Convertibles are almost always protected against stock splits and stock dividends.

If Lufthansa’s common stock were split two-for-one, the conversion ratio would increase from 7,716.049 to 15,432.098.