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

Operating cycle of company, calculate the operating cycle of company which ...

calculate the operating cycle of company which gives the following details relating to its operations. Particular raw material consumption per annum 842000. Annual cost of producti

Advantages and disadvantages of investing in gilts, Advantages and Disadvan...

Advantages and Disadvantages of Investing in Gilts Advantages As the security is issued by the GOI, it has a minimal default risk. Investors have the opportunity to inves

Yield curve strategies, Yield curve strategies take into account the ...

Yield curve strategies take into account the distribution of the maturities of the bonds of the portfolio in order to take advantage of the forecasted movements o

Problems arising due to the existing structure, Problems Arising Due to the...

Problems Arising Due to the Existing Structure The problems that arise as a result of an increase in the population of older generation is universal in nature. Unless there are

What is corporate social responsibility, (a) The term "financial reporting"...

(a) The term "financial reporting" incorporates not only financial statements, but also includes other means of communicating financial and non-financial information. Financial rep

Future value, you just started your first job, and you want to buy a house ...

you just started your first job, and you want to buy a house within 3 years. you are currently saving for the down payment. you plan to save $5,000 the first year. You also anticip

Types of floating-rate securities, Floating rate securities can be br...

Floating rate securities can be broadly divided into following two parts: Floating-rate securities that have constant quoted margin. Floating-rate sec

Steps in process of securitization, Process The process of Secu...

Process The process of Securitization involves the following steps: Transfer of assets by the originator (person holding the assets) to an entity (comp

What are the requirements of ifrs 8, What are the requirements of IFRS 8 ...

What are the requirements of IFRS 8 IFRS 8 requires an organisation to adopt management approach to reporting on financial performance of its operating segments. General idea

182-day t-bills, 182-Day T-Bills Following the Sukhamoy Chakravarty Com...

182-Day T-Bills Following the Sukhamoy Chakravarty Committee recommendations, in November, 1986, 182-day T-bills were introduced in order to develop the short-term money market

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