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
Q. Disadvantages of just-in-time inventory management? A JIT inventory management system mayn't run as smoothly in practice as theory may predict since there may be little room

Which formula would you use to solve for the payment needed for a car loan if you know the interest rate, length of the loan, and the borrowed amount?  Describe. To solve for k

Wha is Asset turnover- performance ratios Asset turnover = Turnover/ Total assets or capital employed This demonstrates how much sales are generated for every £1 of capit

fimnancial accounting system

Balance Sheet Equation Concept The Historical Cost Concept needs support of two other concepts for practical reasons, viz. (i) The Money Measurement Concept (already discus

Multi-period Compounding or else Future Value :- If the company determination compounding interest half-yearly (semi-annually) instead of annually then investors will gain as he wi

What is Financial index & commodity index? Method of index uses in calculation? Weighted average method? How to calculate index?

What are the different types of cash flow to the bondholder of coupon bonds? Coupon bonds deliver two different kinds of cash flow to the bondholder are as follows: a. Face

Determine the Working Capital Decision Investment in current assets is a major activitythat a finance manager is engaged in a daily basis. How much inventory tokeep, how much

Q. Explain about Cash Forecasting Method ? Under this method an approximate is made of cash receipts and payments for the next period. Estimated cash receipts are added to the