Conversion parity price, Financial Management

We defined the conversion premium as the difference between the market price of the convertible and the conversion value. The conversion premium ratio tells us about the magnitude of appreciation in the price that the stock should experience so that a parity price relationship is reached between the convertible bond and the underlying share. Expressed in another way, the profit/loss, if an investor buys a convertible bond, exercises it and sells the equity shares, his position should not change. That is a situation wherein the investor does not experience either profit or loss. This situation is referred to as conversion parity price relationship. The amount of appreciation that the common stock would undergo is also given by,

Conversion parity price of stock =  Bond Price / Number of Shares on conversion per warrant

For the above example, this will be,

         117/10  = Rs.11.70.

 

This ratio indicates that the price should rise by about Rs.0.70 (6.36% of 11), so that parity is reached.

In no circumstances will the market price of the convertible be lower than the conversion price because the investors may make risk-free profits through arbitrage.

Posted Date: 9/10/2012 7:54:45 AM | Location : United States







Related Discussions:- Conversion parity price, Assignment Help, Ask Question on Conversion parity price, Get Answer, Expert's Help, Conversion parity price Discussions

Write discussion on Conversion parity price
Your posts are moderated
Related Questions
All treasury securities are issued on the basis of auction. The auction process is computerized and hence qualified broker-dealers can access it electronically. T


Question: (a) An efficient financial market is assumed to hold under the Capital Asset Pricing Model (CAPM). What is the main hypothesis of an efficient financial market? (

What are the advantages and disadvantages of the internal rate of return method? The internal rate of return (IRR) method is a discounted cash flow method and a number expressed

Q. Basic objectives of cash management? The basic objectives of cash management are two-fold: 1) To meet the cash disbursement needs (payment schedule); and 2) To minimize f

Regulatory Aspect Employees Provident Fund Organization (EPFO) is under the Ministry of Labor and is a primary organization for retirement income for private employees in India

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 values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by ____ the ordinary annuity interest factor by ____. (

Meaning merits nd demerits of modern approch of financial management

Financial analysis The purpose of financial statements is to provide information to all the users of these accounts to assist them in their decision-making. It has to be concer