Conversion parity price, Financial Management

Assignment Help:

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.


Related Discussions:- Conversion parity price

Agency debentures, These debentures are backed by integrity and credi...

These debentures are backed by integrity and creditworthiness. They do not have any specific collateral backing. Therefore, the ability of the issuing GSE to gene

Routine functions, Routine functions For the efficient execution of the...

Routine functions For the efficient execution of the managerial finance functions, routine functions have to be executed. Such decisions concern procedures and systems and incl

Investment strategy of hedge funds, Investment Strategy OF HEDGE FUNDS ...

Investment Strategy OF HEDGE FUNDS After the Funds are raised from genuine investors, the next step for Hedge Funds is to invest them as per the investment objectives and strat

Define the basic motivations for a counterparty, Define the basic motivatio...

Define the basic motivations for a counterparty to enter into a currency swap.  Answer:  One major reason for a counterparty to enter into a currency swap is to exploit the comp

Calculation of wmcc, Q. Calculation of WMCC? The calculation of WMCC re...

Q. Calculation of WMCC? The calculation of WMCC requires several steps to be taken and is subject to the following assumptions: 1) The WMCC is calculated on the basis of market

Calculate the price of a put option contract, The price of a non-dividend p...

The price of a non-dividend paying share, St, follows a geometric Brownian motion process. The current price of the share is £10 and volatility of the share price process is 12% pe

Show social and regulatory factors, Q. Show Social and Regulatory Factors? ...

Q. Show Social and Regulatory Factors? Regulatory climate and legislation against the environmental degradation may impair the profitability of the industry. Price control, vol

Explain the importance of supplier appraisal, QUESTION (a) List the fiv...

QUESTION (a) List the five elements of the purchasing mix. (b) Describe briefly the four essential elements of a legally binding contract. (c) Distinguish between perform

Advantage to corporation of investing in working capital, What is the prima...

What is the primary advantage to a corporation of investing some of its funds in working capital?  By investing in working capital a firm acquires the liquidity it needs helpin

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