Premium, Financial Management

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

Posted Date: 9/10/2012 7:53:05 AM | Location : United States







Related Discussions:- Premium, Assignment Help, Ask Question on Premium, Get Answer, Expert's Help, Premium Discussions

Write discussion on Premium
Your posts are moderated
Related Questions
A fixed income security investor can expect to receive a rupee returns from the following sources: (a) Interest payment, (b) Capital gain or loss at maturity or when so

Q. Show Financial Management Process? The financial management process begins with the financial planning and decisions. While implementing these decisions, the firm has to acq

Explain the term- quality of decisions Performance and business risk This is focussed on " quality of decisions ". The comparison of an organisations performance with t

Q. Major Risk Return Decision Areas? 1) Financial Analysis and Control: This area is concerned with the Financial Statements, i.e. Income Statement, Balance Sheet, Funds Flow S

1) According to the IFE (RIP), if U.S. investors expect a 3% rate of domestic inflation over one year, and a 6% rate of inflation in European countries that use the EUR, and requir

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

Explain how the special drawing rights (SDR) is constructed. Also, discuss the circumstances under which the SDR was created. Answer:   SDR was made by the IMF in 1970 as a new r

Mistakes in Linton's evaluation (1) The preliminary investment in working capital should be offset by a working capital release in the final year, assuming a constant level of

What impact does high inflation have on the value of a business? Besides causing distortion (as it unequally affects all goods and services), inflation enhances the uncertainty

MONOPOLY Several governments consider it necessary to prevent or control monopolies. A untainted monopoly exists when one organisation controls the production or supply of a go