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

Financial audit, To begin this topic, the case of China Sky describes the a...

To begin this topic, the case of China Sky describes the appointment of a special auditor  in the organization that is also a rule in the procedures of Singapore Exchange (SGX). Th

Show the transaction risk, Q. Show the Transaction risk? This is the ri...

Q. Show the Transaction risk? This is the risk occur on short-term foreign currency transactions that the actual income or cost may be different from the income or cost expecte

Financing costs incorporated into capital budgeting analysis, How are finan...

How are financing costs generally incorporated into the capital budgeting analysis process? Financing costs are generally captured in the discount or hurdle rate while doing NPV

The need and analyse different savings instruments, Question 1 Financial p...

Question 1 Financial planning is a process of assessing the goals of an investor. Discuss the meaning, need and scope of Financial planning Question 2 Money management is the

Determine the strategy of market development, Market development A stra...

Market development A strategy which seeks to sell existing products in new geographical markets or new market segments. A strategy to find new uses for existing products or ser

Apv capital budgeting framework helpful for foreign capital, What makes the...

What makes the APV capital budgeting framework helpful for analyzing foreign capital expenditures? The APV framework is a value- additivity method. As international projects fr

Federal reserve board, Federal Reserve Board The Federal Reserve Board ...

Federal Reserve Board The Federal Reserve Board controls the nation's monetary policy, regulates banks, and searches to keep the financial stability of the United States. Its t

Define leverage, Q. Define leverage? Meaning of Leverage: - The diction...

Q. Define leverage? Meaning of Leverage: - The dictionary significance of the term leverage refers to 'an increased means of accomplishing some purpose'. For instance leverage

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