Conversion parity price, Financial Management

Assignment Help:

We defined the conversion premium as the difference between the market price of the convertible and the conversion value. The conversion premium ratio tells us about the magnitude of appreciation in the price that the stock should experience so that a parity price relationship is reached between the convertible bond and the underlying share. Expressed in another way, the profit/loss, if an investor buys a convertible bond, exercises it and sells the equity shares, his position should not change. That is a situation wherein the investor does not experience either profit or loss. This situation is referred to as conversion parity price relationship. The amount of appreciation that the common stock would undergo is also given by,

Conversion parity price of stock =  Bond Price / Number of Shares on conversion per warrant

For the above example, this will be,

         117/10  = Rs.11.70.

 

This ratio indicates that the price should rise by about Rs.0.70 (6.36% of 11), so that parity is reached.

In no circumstances will the market price of the convertible be lower than the conversion price because the investors may make risk-free profits through arbitrage.


Related Discussions:- Conversion parity price

Major proportion of the maximum financing requirement, Q. Major proportion ...

Q. Major proportion of the maximum financing requirement? Whether the credit terms themselves is able to be changed may depend upon the credit terms of competitors when set alo

Accounting rate of return (arr), Accounting Rate of Return (ARR): This ...

Accounting Rate of Return (ARR): This technique relies on the rate of return every project will earn over its life. It takes the help of accounting profit while calculating the

Describes net income approach to capital structure, Q. Describes Net Income...

Q. Describes Net Income Approach to Capital Structure? Net Income Approach: - As-per to the Net Income Approach as suggested by Durand the capital structure decision is applica

Determine stock turnover, a)   Year 2 Year...

a)   Year 2 Year 1   Stock turnover (350/500) * 365 = 255.5 days (250/450) * 365 = 202.7 days

Pay back method, Ask I have included a simple capital investment problem wh...

Ask I have included a simple capital investment problem which is in Course Documents. We are going to use the same numbers for several classes and look at some of the ways that cap

Calculate the expected return and standard deviation, Benjamin Tang current...

Benjamin Tang currently has holdings in the following three companies:                                                                             E(R)                      σ

Explain difference between business risk and financial risk, What is the di...

What is the difference between business risk and financial risk? Business risk considers to the uncertainty a company has regarding to its operating income (as well termed as ear

Yield spread measures for floating-rate securities, In a floating rat...

In a floating rate security, the coupon rate changes periodically as per the reference rate. The yield to maturity of floating rate securities cannot be calculated as

Future arbitrage, A futures contract is a contract to purchase (and sell) a...

A futures contract is a contract to purchase (and sell) a particular asset at a fixed price in a future time period. There are two parties for every futures contract - the seller o

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