risk/return profile of the convertible security, Financial Management

Assignment Help:

Let us consider three scenarios of changes in stock prices and look into the risk return profile of the convertible security. Let us assume that the stock prices remain same, increase and decrease. When the stock prices remain the same, even if a premium is paid to acquire the convertible issue, stock position would under perform the convertible position. This is due to the income from coupon which compensates the capital loss. When the stock prices decline, as the straight value provides a floor for the convertible, the convertible position outperforms the stock position. This analysis is made assuming that the straight value remains same and does not change except for the passage of time. But, in reality as the interest rates increase the straight value will decline. Like any other instrument, convertible securities also have advantages and disadvantages. The disadvantage is that the upside potential is given-up because of the premium paid on every share but on the other side, it helps in reducing downside risk.


Related Discussions:- risk/return profile of the convertible security

Working of australian securities and investment commission, Working of ASIC...

Working of ASIC ASIC as an independent government body enforces and regulates company and financial services laws to protect consumers, investors and creditors. It keeps the pu

6 KEY STAGES OF INVESTMENT DECISION WITH APPROPRIATE DIAGRAM, 6 KEY STAGES ...

6 KEY STAGES OF INVESTMENT DECISION WITH APPROPRIATE DIAGRAM

Importance of capital budgeting decision, Q. Importance of Capital Budgetin...

Q. Importance of Capital Budgeting Decision? 1. Such Decision affect the profitability of the Firm: - Capital Budgeting decision influences the long-term profitability of a fir

Break even sales, given just the sales and profit values, how is the break-...

given just the sales and profit values, how is the break-even sales calculated?

Calculate the cash flows, Your firm will produce widgets for the next 10 ye...

Your firm will produce widgets for the next 10 years (starting at t=1). Annual revenue from selling widgets is $20,000. Production requires an initial outlay (at t=0) for machin

Common-size analysis, Common-size Analysis • Prepare a Common-size Analy...

Common-size Analysis • Prepare a Common-size Analysis for the Balance Sheet and Income Statement • This should include about 12 accounts in the Balance Sheet and about 10 Inc

Under what circumstances is a warrant''s value high, Under what circumstanc...

Under what circumstances is a warrant's value high ?  Explain. A warrant's value would be elevated when the stock price, time to expiration, and/or expected stock price volatil

Final Project AFM, Ask questiona) Maju Construction (MCo) Sdn. Bhd. is bidd...

Ask questiona) Maju Construction (MCo) Sdn. Bhd. is bidding on a contract to build four tiny camping house (TCH) a year for the next three years for Sintokian campsite. Each TCH wi

Portfolio duration, We can measure the portfolio duration by calculat...

We can measure the portfolio duration by calculating the weighted average of the duration of the bonds in the portfolio. The proportion of the portfolio that a se

Investing surplus cash, Investing Surplus Cash : Cash not required for temp...

Investing Surplus Cash : Cash not required for temporary periods of short durations can be invested in near-cash assets, i.e. marketable securities which are readily convertible in

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd