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 planning assignment, School of Business BUACC1521 Personal Financ...

School of Business BUACC1521 Personal Financial Planning ASSIGNMENT 1. General information As detailed in the Course Description, the assignment constitutes 30% of the tota

Explain taxonomy of financial intermediaries, Taxonomy of financial interme...

Taxonomy of financial intermediaries We start by looking at the USA, the largest economy and financial system in the world. Subsequently we will turn to other countries. In the

Alternative summarised version of tests of controls, Alternative summarised...

Alternative summarised version of tests of controls · Segregation of duty (staff records are separate from wages department) · Documentation ( written evidence ) ·

Explain about the debt policy, Explain about the debt policy Designing...

Explain about the debt policy Designing debt policy the debt policy of a firm is significantly influenced by the cost consideration. In designing financing policy, that is, p

Arrow as an fsa’s risk based approach to regulation, ARROW as an FSA's risk...

ARROW as an FSA's risk based approach to regulation ARROW stands for Advanced, Risk-Responsive Operating Framework. In January 2000, FSA set out a proposed approach to regulati

What are the aspects of receivables management, Q. What are the Aspects of ...

Q. What are the Aspects of Receivables Management? Scope or else Aspects or Receivables Management: - Extent of receivables management is quite wide. It comprises the following

Federal open market committee, Federal Open Market Committee The princi...

Federal Open Market Committee The principle document making body of the Federal Reserve, the FOMC consists of 7 governors of the Federal Reserve System and 12 Federal Reserve D

Example on bills of exchange, Q. Example on Bills of exchange? ARG Co w...

Q. Example on Bills of exchange? ARG Co will be apprehensive to protect the sterling value of its expected dollar receipt. The quoted forward rates demonstrate that the dollar

Working capital management, WORKING CAPITAL MANAGEMENT Working capital ...

WORKING CAPITAL MANAGEMENT Working capital relates to the capital required for daily operations of a business enterprise.  The requirement for Working Capital is omnipresent fo

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