risk/return profile of the convertible security, Financial Management

Let us consider three scenarios of changes in stock prices and look into the risk return profile of the convertible security. Let us assume that the stock prices remain same, increase and decrease. When the stock prices remain the same, even if a premium is paid to acquire the convertible issue, stock position would under perform the convertible position. This is due to the income from coupon which compensates the capital loss. When the stock prices decline, as the straight value provides a floor for the convertible, the convertible position outperforms the stock position. This analysis is made assuming that the straight value remains same and does not change except for the passage of time. But, in reality as the interest rates increase the straight value will decline. Like any other instrument, convertible securities also have advantages and disadvantages. The disadvantage is that the upside potential is given-up because of the premium paid on every share but on the other side, it helps in reducing downside risk.

Posted Date: 9/10/2012 8:03:18 AM | Location : United States







Related Discussions:- risk/return profile of the convertible security, Assignment Help, Ask Question on risk/return profile of the convertible security, Get Answer, Expert's Help, risk/return profile of the convertible security Discussions

Write discussion on risk/return profile of the convertible security
Your posts are moderated
Related Questions
Specific Cost of Capital When the Cost of every source of capital is individually calculated, it is known as Specific Cost of Capital example Cost of equity, cost of debt, etc

Explain the bird in the hand theory of cash dividends. The bird in the hand dividends theory state that dividends received now are better than a promise of future dividends.  U

The straight value of a convertible bond is nothing but the value of a non-convertible bond having same characteristics. For example, assume that a company has tw

Accounting Rate of Return (ARR): This technique relies on the rate of return every project will earn over its life. It takes the help of accounting profit while calculating the

Multicollinearity As the degree of correlation between the independent variables increases, the regression coefficients become less reliable. That is, although the independent

How can we measure Total return- Measuring the Rate of Return Total return can be defined as: Total returns = (Cash payment received + Price change over the period) / Purcha

Cash Flow Statement Ratios: This ratio, which is defined as a percentage, compares a company's operating cash flow to its total sales or revenues, which provide investors an i

Goal of Shareholders wealth maximisation Shareholders' wealth maximisation goal gives us the best results since effectsof all the decisions taken by company and its managers ar

Q. Criticism of Wealth Maximization? i) The objective of wealth maximization is not, necessarily, socially desirable. ii) There is some controversy whether the objective of

1. The Gulf had sales of  AED 20,000,000 and cost of goods sold of  AED 10,250,000. Selling and administrative expenses represented 8 percent of sales. Depreciation was 5 percent o