 A convertible bond is similar to a bond with a warrant but there exists an important difference between these two securities that bond with a warrant can be separated into different and distinct securities whereas a convertible bond cannot. A convertible bond gives a ride to its holder to exchange a certain number of shares from the company during a certain period of time or till the maturity date of the bond. Let's see how convertible bond works. We have an example of bonds issued by TUTOR on September 12, 2014. The TUTOR issued $900 million worth of bond. It issued 8 years maturity bond with 11% rate of interest and these are convertible bonds. Now if we determine the conversion ratio it comes to 12.87 shares for each bond as a conversion ratio and if we need to determine the conversion price on this particular convertible bond then it is the ratio of the bond's face value to the conversion ratio. This means that we need to divide the amount of face value of the bond over the number of shares to be converted and the conversion price comes to $77.64 per bond and if we need to determine the conversion premium which is in fact the excess of conversion price over the market price and in our case the conversion premium is equal to 49%. This is making conversion option for the bond holder being out of money. This means that there is an immediately unprofitable conversion so bond holder will not opt conversion at this particular moment. convertible bonds are basically work as a protection against stock splits and stock dividends for the company. The value of a particular bond comes from three different dimensions. The first is the straight bond value, the second is the conversion value and third is the option value. So this means the value of a convertible bond has three distinct components. The straight bond value can be determined as usual as we know that the present value of coupon on a bond and the present value of its face value. So the sum of these two present values determine the overall present value of a particular straight bond. To determine conversion value, let's see, conversion value is the value of our convertible bonds that depends on conversion value. It is the worth on immediate conversion into the common stock at a current market price. But it cannot sell at below its conversion value, which means that a convertible bond is generally not sold by the holder at its below its convertible value. Because the arbitrage is there that prevents bond holder from doing this. So we can say that the profit on a convertible bond is the difference between the market price of the share and the convertible or conversion value of the bond. A convertible bond further has two minimum values. The first is the straight bond value and second is the conversion value. Let's see an example how the conversion value of a bond can be determined. If we determine the conversion value of the tutor's convertible bond, we see it is $475.63 per share. Now if we see the diagram, the vertical upward sloping line is showing the value of the convertible bond. We see that the minimum or the floor value on this particular bond is basically the higher of its straight bond value or its conversion value. The conversion value is then determined by the value of the firm's underlined stock. And this conversion value then moves in line with the stock's market price. The third component of the value of the convertible bond is called as option value. A convertible bond holder generally may not go for immediate conversion. But he can use an option. In this regard, he may wait to take benefit of higher of the straight value or conversion value to occur in future. The option to wait in this case has a certain value and this value goes on rise over both the cases. Like if the firm's lower value, the convertible bond's value more significantly influenced by the underlying value as a straight date. Whereas there is a higher value for the firm, then the convertible bond's value is mostly determined by the underlying conversion value. And if we see the figure in the right panel, we can see that the value of convertible bond in this case is the sum of its floor value and the value of option that is used by the bond holder.