Definition of premium over bond value

upward difference between the 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, will normally sell at a premium over its bond value because investors place a value on the conversion feature. The higher the market price of the issuer's stock is relative to the price at which the bond is convertible, the greater the premium will be, reflecting the investor's tendency to view it more as a stock than as a bond. When the stock price falls near or below the con-version price, investors then tend to view the convertible as a bond and the premium narrows or even disappears. Other factors affecting the prices of convertible bonds generally include lower transaction costs on the convertibles than would be incurred in buying the stock outright, an attraction that exerts some upward pressure on the premium; the demand from life insurance companies and other institutional investors that are limited by law as to the common stock investments they can have and that gain their equity participation through convertibles; the duration period of the option to convert-the longer it is, the more valuable the future and the higher the premium; high dividends on the issuer's common stock, a factor increasing demand for the common versus the convertible, and therefore a downward pressure.