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

Equity share valuation.., Mount Hutt Ltd. just paid dividend of $2.20 per s...

Mount Hutt Ltd. just paid dividend of $2.20 per share. The dividends are expected to grow at a constant rate of 4% per year, indefinitely. If investors require an 11% return on Mou

Companies accuse investors of performing credit sales, At times, companies ...

At times, companies accuse investors of performing credit sales that they make their quotations fall. Is that true? It is true: there are companies that accuse investors who pe

Determine the financial structure of business risk, Determine the Financial...

Determine the Financial structure of business risk Financial structure shifts toward suppliers of funds recognize a more highly levered position increased financial risk associ

Benefits of niche and specialisation markets, a) Ltd. stands for ‘private l...

a) Ltd. stands for ‘private limited company', i.e. a business with limited liability with shares being issued only to friends and family with the approval of the board of directors

Financial management, BigGardens Ltd (BigGardens) is a private company that...

BigGardens Ltd (BigGardens) is a private company that owns and operates a chain of garden centres in the Bristol area.  The company has expanded rapidly over recent years, opening

Determine the circumstances is a warrant’s value high, Under what circumsta...

Under what circumstances is a warrant’s value high?  Explain. A warrant’s value would be high while the stock prices, time to expiration, and/or expected stock price volatility a

Capital gain or loss, An Investor can receive income from this ...

An Investor can receive income from this source when the bonds purchased at discount are held up to maturity or when he sells the bond before ma

Show the accept-reject criteria, Q. Show the Accept-Reject Criteria? Ac...

Q. Show the Accept-Reject Criteria? Accept-Reject Criteria:- If the actual payback period is not more than the predetermined payback period...................... Project

Financial management, considering the following information,what is the pri...

considering the following information,what is the prise of the share as per gorden''s model?

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