The excess of the market price of the convertible over its bond value (bond floor). It is typically expressed as a percentage as follows:
Risk premium= (convertible price/bond price) – 1
For example, if the bond floor of a $100-par bond is $91.5, then:
Risk premium = (100/91.5) – 1 = 9.29%
This premium can be viewed as the value that the market places on the conversion option. It measures the additional amount a fixed-income investor would require over the bond floor to pay for an option on the underlying shares.
