Question 5.S-TQ5: Explain the difference between a conversion premium and a ri...

Corporate Finance Principles and Practice [693350]

Explain the difference between a conversion premium and a rights premium.

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The conversion premium is the premium per share on converting a convertible bond into equity. The rights premium is the premium per share of a convertible security over an equivalent bond with a similar coupon, reflecting the option to convert carried by the convertible security. The relationship between conversion premium, rights premium and market value of a convertible bond can be illustrated by a diagram (see Figure 5.2).

5.2

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