Premium, Financial Management

Assignment Help:

The amount by which the market price exceeds the conversion value or the investment value called the premium. When expressed as a percentage, it is given by,

         Conversion premium = (Market Price - Conversion value)/Conversion value x 100

The conversion value can be lower than or greater than the investment value. Irrespective of this, the premium exists. This may be due to the investor's expectations that in future, the underlying stock may experience a price rise. These relationships can be better understood from Figure 1.

Figure 1

255_premium.png

From Figure 1, we observe that the investment value serves as a floor for the price of the convertible security, in a scenario of price decline of the underlying stock. When the market price of the stock exceeds certain value, the conversion value exceeds the investment value. The market value of the convertible security on most occasions exceeds its conversion value and investment value. The market premium is greatest at the point of intersection of the investment value and the conversion value.

In the above figure, we could understand the changes in the market price of the convertible with respect to conversion and investment values figuratively. If we express these relationships in relative terms, we have the following ratios:

Premium over Conversion Value = 432_premium1.png

Premium over Investment Value = 532_premium2.png


Related Discussions:- Premium

Calculate profitability index, XYZ Ltd is a manufacturer and distributor of...

XYZ Ltd is a manufacturer and distributor of agricultural equipment. XYZ produces milking machines and supplies as well as being the sole Australian distributor of machinery from t

What are the needs for financial statement analysis, Q. What are the needs ...

Q. What are the needs for financial statement analysis? The financial statements are to be studies for the following purposes. a) To make comparisons between two sets of fin

Risk-free interest rate, Price an Asian call option with on a stock with th...

Price an Asian call option with on a stock with the initial stock price $50 and volatility 30$. The strike price of the option is $52. The time to maturity of the option is 3 month

Estimate the average beta of investment in the t-bills, You know that Treas...

You know that Treasury bills have a beta of 0 because they are risk-free.  A portfolio of technology stocks has a beta of 3.  You plan to invest 40% of your investment capital in T

Long-term debt finance, The approaches that Blin could accept regarding the...

The approaches that Blin could accept regarding the relative proportions of long- and short-term finance to meet its working capital needs have been described as moderate, conserva

The visitors perceive to justify the renovation, Lincoln Park Zoo in Chicag...

Lincoln Park Zoo in Chicago is considering a renovation that will improve some physical facilities at a cost of $1,800,000. Addition of new species will cost another $310,000. Addi

Declaration of auction results, Typically, there exist two type...

Typically, there exist two types of bids in the treasury auction process. They are: Competitive bid and non-competitive bid. A non-competitiv

Assessment of in individual strengths and weaknesses, Assessment of in indi...

Assessment of in individual strengths and weaknesses Before finalizing career plan for an individual and placing him on career path, it is necessary to access his strengths and

APPLICABILITY OF OPERATING CYCLE, #questioDiscuss the applicability of an o...

#questioDiscuss the applicability of an operating cycle in the vegetable growing business n..

Explain the three kind’s non-financial incentives, Q. Explain the three kin...

Q. Explain the three kind’s non-financial incentives? Non-Financial incentives: Incentives which cannot be offered in terms of money are known as non-¬financial incentives. Ind

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