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

Monte-carlo simulation, Monte-Carlo Simulation Let us, for a shortwhil...

Monte-Carlo Simulation Let us, for a shortwhile, leave the illustration for determining the price and consider a simpler illustration for understanding the Monte-Carlo method

Ratchet bonds, The coupon rate of these types of bonds is adjusted pe...

The coupon rate of these types of bonds is adjusted periodically at a fixed margin over a reference rate. It can be adjusted southward only and once it is adjuste

Working of financial services authority, Working of FSA The FSA Board ...

Working of FSA The FSA Board is responsible for the management of FSA. It is appointed by the Treasury. It consists of a chairman, a chief executive officer, three managing dir

Market capitalization, Market Capitalization : Often referred to as marke...

Market Capitalization : Often referred to as market cap, it refers to the value of a company, that is, the market worth of its outstanding shares. A common misconception is that

BCF103 - Fundamentals of Business Financial Management, The TERRIER program...

The TERRIER program cost estimate is in constant FY 2011 dollars, while the SPANIEL program cost estimate is in constant FY 2014 dollars. what is the most valid way of comparing th

Explain about the financial management, Explain about the Financial managem...

Explain about the Financial management Financial management is concerned with efficient use of a significant economic resource (input), namely, capital. It's, so, argued that p

Find the minimum annual savings, Baldwin Company is interested in buying a ...

Baldwin Company is interested in buying a new corporate jet for $6 million. It will depreciate the jet fully in 5 years and then sell it for $5 million. The jet will use $60,000 in

Deriving 6-month forward rates, Using details from table 8, let us co...

Using details from table 8, let us compute the 6-month forward rate. Simple arbitrage principle, like the one used to compute the spot rates are used in this proc

Define minimum price make producers as a whole worse off, Suppose the gover...

Suppose the government regulates the price of a good to be no lower than some minimum level. Can such a minimum price make producers as a whole worse off?  Explain. As a higher

Merits and demerits of accept-reject criteria, Q. Merits of accept-reject c...

Q. Merits of accept-reject criteria? Merits of ARR:- (i) Simple: - ARR method is very simple to understand and use. (ii) Complete life time of the project is considered:

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