risk/return profile of the convertible security, Financial Management

Assignment Help:

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.


Related Discussions:- risk/return profile of the convertible security

Cost of capital, AThe Nu-Nu Brothers Inc. (NNBI) has the following capital ...

AThe Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equity 60% NNBI''''s expected net incom

Display profit diagrams for long stock and for short stock, Question: (...

Question: (a) A stock currently sells for $80 and a put option with an exercise price of $80 currently sells for $2. Find the percentage gain to an investor in the common stock

Share price, what course a decrease and increase in share price

what course a decrease and increase in share price

Find the impact of price and trading volume, Purpose of research: The a...

Purpose of research: The aims of this research are to examine the effectiveness of speculation on efficiency of Petrochemical sector in Saudi Arabia financial market"TADAWUL".

What are the time dimensions of the income statement, What are the time dim...

What are the time dimensions of the income statement, the balance sheet, and the statement of cash flows? Hint: Are they videos or still pictures?  Explain. Sol. The i

Why are trend analysis and industry comparison important, Why are trend ana...

Why are trend analysis and industry comparison important to financial ratio analysis? Trend analysis assists financial managers and analysts see if a company's current financia

Find out covariance between the two stocks, The stocks of Microsoft and Ap...

The stocks of Microsoft and Apple have a correlation coefficient of 0.6.  The variance of Microsoft stock is 0.4 and the variance of Apple stock is 0.3.  What is the covariance bet

APR and EAR, Assume a bank charges a 15.5% APR (annual percentage rate) on ...

Assume a bank charges a 15.5% APR (annual percentage rate) on credit card holder compounds quarterly. What EAR (effective annual rate) is the bank is charging? What if they change

Hedge funds, Hedge Funds: Hedge Funds are investment partnerships that ...

Hedge Funds: Hedge Funds are investment partnerships that strive for above average returns through active portfolio management and whose primary compensation is a percentage of

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