Conversion Premium

The surplus at which an adaptable security may be sold beyond its transfiguration value is known as premium. If the market price of an alterable security rises, its conversion premium declines. A bond valuing $1500, which is convertible into 50 common stock shares of $25 each will sell on a conversion premium of $250 {$1500 – (50 x $25)}.

Conversion premium is basically the exceeding percentage or the amount in dollars than would be yielded if convertible security is converted into public stock. Financiers quite often check if the prevailing status of a convertible investment would eventually result in their best interest at a certain point of time. If situation is favorable, the conversion premium could be pretty much; making the investment profitable or it may even be low making essentially the investment a not so fruitful venture.

Besides the calculation of profit or loss on a certain conversion, calculation the conversion premium also determines if it is a good or a bad time to convert your convertible securities. In actual fact then, if the common stock’s current market value is inferior to the fraction that shall be received upon converting the convertible security, it is best that the investor does nothing. If at that time the investor chooses to convert his securities into stock he would then be losing his valuable time and money both.

Numerous factors can be responsible for having an influence on the dollar amount or ratio of the conversion premium. Primarily they have to fix with the alterable security itself and how it influences the current transaction cost and how it may effect over the course of time of a proffered option of conversion. While on the other hand, the measurement of any common dividend involved is bound to have either a favorable or an un-favorable influence on the premium of a convertible security.