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

FDD , fimnancial accounting system

fimnancial accounting system

Sensitivity analysis, Sensitivity Analysis A test of an organizations p...

Sensitivity Analysis A test of an organizations performance projections based on varying the key assumptions which is used for forecast performance.

Explain the capital market process, Question 1 State the key functions of ...

Question 1 State the key functions of the financial market. Question 2 Define "Bill of exchange". What are its features? Give different types of cheques. Question 3

Constructing the binomial interest rate tree, How to calculate the up anh d...

How to calculate the up anh down factor in the binomial interets rate tree

Is there an optimal capital structure, Is there an optimal capital structur...

Is there an optimal capital structure? What is it and how can it be calculated? There is no optimal capital structure. Capital structure is a variable which depends on the incl

APR and EAR, Assume a bank charges a 15.5% APR (annual percentage rate) on ...

Assume a bank charges a 15.5% APR (annual percentage rate) on credit card holder compounds quarterly. What EAR (effective annual rate) is the bank is charging? What if they change

Determine the symptoms of overtrading, Determine the Symptoms of overtradin...

Determine the Symptoms of overtrading Symptoms of overtrading are:- Fast sales growth Increasing trade payables Increasing trade receivables Fall in cash ba

Valuing mortgage-backed and asset-backed securities, A cash-flow yield is t...

A cash-flow yield is the discount rate that makes the price of a mortgage-backed or asset-backed security equal to the present value of its cash flows. It is built

Define how do mergers affect small businesses, How do mergers affect small ...

How do mergers affect small businesses? A: As per to a recent study by Federal Reserve and Wharton Financial Institutions Center economists, not a big deal. Their analysis reve

Liabilities, compare and contract the potential liabilities of owners of pr...

compare and contract the potential liabilities of owners of proprietorship,partnership and corporation

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