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

Book value and liquidation value per share for common stock, Compare and co...

Compare and contrast the book value and liquidation value per share for common stock. Is one method more reliable? Explain. The Book Value of a firm's common stock is institute

Determining the value at a node or backward induction, The value of node is...

The value of node is determined using a methodology called backward induction. The value at any node depends on the future cash flows; therefore, we need to start from

Nature of the business, Q. Nature of the business? The working capital ...

Q. Nature of the business? The working capital requirement of the firm basic depends upon the nature of the business. public utility undertaking like the water supply and rai

What to do to maximise profits of the company, What to do to maximise profi...

What to do to maximise profits of the company If you want to maximise profits, there are only two methods to do it. Either you decrease your expenses (also known as costs) or y

Explain the term- interest cover, Explain the term- Interest cover Int...

Explain the term- Interest cover Interest cover =Profit before interest and tax (PBIT)/ Interest payable(no. of times) Interest cover represents the safety of earnings tha

Financial bootstrapping, Briefly describe the major differences between a s...

Briefly describe the major differences between a sole proprietorship and a corporation. Under which form would you choose for a business, and why? Describe the meaning of financi

Determine current cost of equity, Your task is to determine CDW's current c...

Your task is to determine CDW's current cost of equity. Since the company is not yet publicly traded , you need to estimate its cost of equity from a set of comparable companies. U

par value, The face value of the debt security can be thought of as ...

The face value of the debt security can be thought of as the principal amount on which interest is paid by the issuer. It is the amount the issuer is willing to r

Difference between transaction and translation risk, Question: You have...

Question: You have been appointed as the head of the treasury of Platza International, an automobile firm with many subsidiaries abroad. The management of Platza International

Cash flow statement, Given below are the cash flows of a project. Find out ...

Given below are the cash flows of a project. Find out the net present value of the project. Cost of capital is 18% and initial investment is Rs. 2,00,000. Year Cash Flows (lakhs)

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