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conversion value of a convertible
security. The market value of a convertible is likely to be greater than its straight value or
its conversion value. The amount by which the market value exceeds its straight
or conversion value is called the market premium. The general relationships
among the straight bond value, conversion value, market value, and market premium for Duncan Company’s convertible bond are shown in Figure 16.1. The
straight bond value acts as a floor for the security’s value up to the point X,
where the stock price is high enough to cause the conversion value to exceed the
straight bond value. The market premium is attributed to the fact that the convertible gives investors a chance to experience attractive capital gains from
increases in the stock price, while taking less risk. The floor (straight bond value)
provides protection against losses resulting from a decline in the stock price
caused by falling profits or other factors. The market premium tends to be greatest when the straight bond val...
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This document was uploaded on 01/19/2014.
- Fall '13