DOES THE LEVEL OF THE PREMIUM ON CONVERTIBLE PREFERRED SHARESEVER - ProProfs Discuss
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Does the level of the premium on convertible preferred sharesever change?



Asked by Violet, Last updated: Sep 23, 2022

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Assume that everyone in the world thinks the underlying common stock is a really hotprospect. intuitively, it makes sense for the premium on the preferred share to rise inprice if the demand for the common share is assumed to be high and to be increasing.given that assumption, it would make sense for the convertible preferred share price toadjust to a level that produces a higher premium.the opposite holds true. a low premium may indicate that the underlying commonstock is not a hopeful prospect. with respect to investor perception, the less likely theunderlying common share is to appreciate in value, the less likely an investor would bewilling to pay a high premium when purchasing the convertible preferred shares.so when you see a low premium, your first reaction might be that its a really great dealfinancially for you as an investor who is interested in buying a convertible preferred.but you must also consider that the low premium may be low for a good reason.
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