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

What is the time value of money, What is the time value of money? The t...

What is the time value of money? The time value of money signifies that money you hold in your hand today is worth more than money you expect to receive in the future. Likewise

Calculate the cumulative probability , Compound options are usually cheaper...

Compound options are usually cheaper than vanilla options and we know that there are four main types of compound options: a call on a call; a put on a call; a call on a put; a put

Inventory turnover ratio or stock turnover ratio, I need a report on the to...

I need a report on the topic Inventory Turnover Ratio. Can you please assist me for Inventory Turnover Ratio report for about 2500 words?

Auction technique, Auction Technique Auction is the most common method ...

Auction Technique Auction is the most common method to sell Government Securities. Other methods include tap sales, syndication and book building process. Presently many countr

Role of custodians, Role of Custodians The Securities and Exchange Boar...

Role of Custodians The Securities and Exchange Board of India on 5th May, 1996, through its notification No.S.O.344 (E) has issued the SEBI (Custodian of Securities) Regulation

Value of conversion benefits, Having seen the measure used for ...

Having seen the measure used for analyzing the convertible bonds, let us now examine the merits and demerits of convertible bonds, and why or wh

Finance case study, This case has been framed in order to test the skills i...

This case has been framed in order to test the skills in evaluating a credit request and reaching a correct decision. Perluence International is large manufacturer

Functions of derivatives market, Functions of Derivatives Market: To re...

Functions of Derivatives Market: To reduce risk or eliminate risks some ways and methods are there. Risk in the capital market can be reduced by diversification or putting eggs

What is free cash flow, A financial consultant obtains different valuations...

A financial consultant obtains different valuations of my company when it discounts the Free Cash Flow (FCF) as opposed to when it uses the Equity Cash Flow. Is this correct? N

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