Just to confirm on the image attached.
Are we comparing market price of share with conversion price ( face value/N)
or are we comparing market price of the share with market conversion price (price of convertible bond/ N) ?
Also can you please explain what is the logic/reason of using conversion price (face value of bond/ N) ?
Suppose there is a Convertible Bond with face value of $1,000 and you can convert one bond into 5 shares. Here the conversion price would be $1,000/5 = $200.
This basically means than you are buying a share at $200. Now if market price of the share is $150, you will never think of converting the bond and continue to hold the bond as if its a non convertible bond. This explains your case 1.
We are comparing market price of the underlying stock and conversion price which can computed as explained above.