Conversion premium

During the book runner phase, banks go in the market with a range of coupons and conversion premium in which each value in the range has a different implied volatility, representing the market sentiment. Thus, the market supply... 

The reason to use implied volatility is that market anticipates mean reversion and uses the implied volatility to gauge the volatility of individual assets relative to the market. Implied volatility represents a market option about the underlying asset and therefore is forward looking. However, the estimate of implied volatility is conditioned by the choice of other inputs in particular, the credit spread applied in the option-free bond and the conversion premium of the tmderlying asset (Example 9.2). 

Justifying the Conversion Premium at Issue The first important decision for pricing convertible bonds is to decide the conversion premium above the stock price at issue. The conversion premium at issue determines the conversion price, that is the point in which there is parity relationship between the underlying asset and the convertible bond. In fact bonds are often issued with a premium and the conversion price, also known as the strike price, is the actual price paid for the shares when conversimi occurs. 

The conversion price, and indirectly the conversion premium, represents the potential upside of the underlying security. Therefore, the estimate of the conversion premium needs two analyses ... 

Fundamental approach Focusing on the value of underlying asset therefore, the conversion premium and conversion price at issue is also determined using equity valuation methods or simply by looking the target price estimated in equity research reports (Example 9.3). 

In rising stock markets, beta > 1 benefits from the index appreciation because the probability of rising stock prices and, therefore, to convert the bond will increase. Therefore, a greater beta determines a greater cost of capital and consequently a lower present value of cash flows. This means that the target price of the underlying asset will be lower, reducing the conversion premium. 

FIGURE 9.19 Convertible price sensitivity - Conversion premium. 

In contrast, an increasing conversion premium decreases the value of the convertible. For instance, a conversion premium of 60% the convertible bond prices around 100. Therefore, increasing the conversion premium the option element decreases, and the convertible bond prices with values closed to the bond floor. 

FIGURE 9.21 Negative correlation between stock price and conversion premium of BNSIM 2 / % 2019, on CNVG screen. (UsedwithpermissionofBloomberg L.P. Copyright 2014. Allrights reserved.)... 

Maturity Coupon Yld to Mty Maturity Conversion Premium at Implied Premium... 

Total return investment Most convertibles are issued as total return instruments, with the investor considering both the bond yield and the conversion premium on the equity. They will continue to trade like this unless the equity moves strongly either up or down. As a total return investment, the bond will exhibit roughly symmetrical conversion premiums. Its price is sensitive to both movements in the price of the underlying equity and market views on the credit outlook of the company. If the share price rises, the conversion option value increases as the conversion premium decreases, although at a slower rate compared to the equity itself. The reverse occurs if the share price falls, but the bond has downside protection, so as it approaches its bond floor, it outperforms the share and becomes less sensitive to movements in the share price. 

When evaluating convertible securities, the investor will consider the expected performance of the underlying shares, the future prospects of the company itself, and the relative attraction of the bond as a pure fixed-income instrument in the event that the conversion feature proves to be worthless. The investor will also take into account the credit quality of the issuer, the yield give-up suffered as a result of purchasing the convertible over a conventional bond, the conversion premium ratio, and the fixed-income advantj e gained over a purchase of the underlying shares in the first place. 

The conversion premium is the percentage by which the conversion price exceeds the current share price. The ABC PLC bond has a conversion ratio of 117.64 (that is, 117.64 shares are received in return for the bond with a par value of 1,000) and therefore a conversion price of 8.50. If the current price of the share is 6.70, then we have equation (13.6). 

The products could be classified as a function of various criteria physical properties (in particular, volatility), the way they are created (primary distillation or conversion). Nevertheless, the classification most relevant to this discussion is linked to the end product use LPG, premium gasoline, kerosene and diesel oil, medium and heavy fuels, specialty products like solvents, lubricants, and asphalts. Indeed, the product specifications are generally related to the end use. Traditionally, they have to do with specific properties octane number for premium gasoline, cetane number for diesel oil as well as overall physical properties such as density, distillation curves and viscosity. 

As a 1.7 dtex (1.5 den) fiber, it can be spun into yams with a better strength conversion factor than other ceUulosics, aUowing rotor-spun Tencel to outperform ring-spun cotton or modal viscose. Fabrics can be made at high efficiency, and prove to have the anticipated tear and tensUe advantages over other ceUulosics. Direct, reactive, or vat dyes can be used, and easy care properties can be achieved with less resin finish than normal. Tencel could therefore be positioned as a new premium quaUty apparel ceUulosic and not simply as a long-term replacement for viscose. 

In the phosphoric acid fuel cell as currently practiced, a premium (hydrogen rich) hydrocarbon (e.g. methane) fuel is steam reformed to produce a hydrogen feedstock to the cell stack for direct (electrochemical) conversion to electrical energy. At the fuel electrode, hydrogen ionization is accomplished by use of a catalytic material (e.g. Pt, Pd, or Ru) to form solvated protons. 

The thermodynamics are indicated in Figure 14.6, using data from [41]. There is a considerable drop in the equiUbrium isobutene concentration, from almost 60 mol% at 400 K to only about 30% at 1000 K. This places a premium on an active catalyst to obtain high conversions at temperatures that yield reasonably high equilibrium conversions. 

Figure 2 Activation energy for conversion to toluene solubles vs. total oxygen content of Argonne Premium Coal sample bank bituminous coals.

The 100 BPD MTG project was extended recently to demonstrate a related fluid bed process for selective conversion of methanol to light olefins (MTO). The products of the MTO reaction make an excellent feed to the commercially available Mobil Olefins to Gasoline and Distillate process (MOGD) which selectively converts olefins to premium transportation fuels ( 1). A schematic of the combined processes is shown in Figure 1. Total liquid fuels production is typically greater than 90 wt% of hydrocarbon in the feed. Distillate/gasoline product ratios from the plant can be adjusted over a wide range to meet seasonal demands. 

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