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

Describe the balance of payments identity, Describe the balance of payments...

Describe the balance of payments identity and discuss its implications under the fixed and flexible exchange rate regimes. Answer:  The balance of payments recognize holds that t

What is the deferred tax asset or liability at the end yr, AB Corp expensed...

AB Corp expensed on the financial stmt $2,000,000 for depreciation expense during the year using straight line depreciation and deducted $3,000,000 of depreciation on the tax retur

Capital budgeting, identify and explain the key stages in the capital inves...

identify and explain the key stages in the capital investment decision-making process and the role of investment appraisal in this processs..

Finance, Do you provide help in college level Managerial Finance?

Do you provide help in college level Managerial Finance?

Leveraged buyout (lbo), Leveraged Buyout (LBO) Acquisition of an organi...

Leveraged Buyout (LBO) Acquisition of an organization through the accumulation of 70 % or more of the organizations total capitalized debt.

Explain capital investment project appraisal, Question: (a) The future ...

Question: (a) The future value (F) of a sum invested now can be calculated using the formula: F = P(1 + r) n Required: (i) Describe each of the other constituents in the

Annual Inventory Costs., Harley Davidson purchases components from three su...

Harley Davidson purchases components from three suppliers. Components purchased from Supplier A are priced at $ 5 each and used at the rate of 240,000 units per year. Components pu

Explain about opportunity cost of capital, Explain about opportunity cost o...

Explain about opportunity cost of capital Risk free rate compensates for opportunity lost and risk premium compensates for risk. It can also be known as the 'opportunity cost o

Discount and premium, What is the  Discount and Premium? Describe please.

What is the  Discount and Premium? Describe please.

Shareholders'' wealth maximization, Shareholders' wealth maximization S...

Shareholders' wealth maximization Shareholders' wealth maximization refers to maximization of the net present value of every decision made in the firm. Total present value is e

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