Monday, January 11, 1999
INVESTMENT PRIMER
What is meant by premium over bond value?
It is the difference between market value of a convertible bond and the price at which a straight bond of the same company would sell in the same open market. A convertible bond, eventually convertible to common stock, usually sells at a premium over its bond value because investors value its conversion feature.
The higher the price of the issuer's stock relative to the bond's conversion price, the greater the premium will be, reflecting investor tendency to view it more as a stock than bond. When the company's stock price falls near or below the conversion price, investors then tend to view the convertible as a bond, and the premium narrows or even disappears.
Have you seen an investment term you'd like to understand better? Write to Ursula Miller, The Cincinnati Enquirer, 312 Elm St., Cincinnati 45202. Phone: 768-8573.
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