Question

In: Finance

Bombardier Inc's bond with 25 detachable warrants has just been offered for sale at $1,000. The...

Bombardier Inc's bond with 25 detachable warrants has just been offered for sale at $1,000. The bond matures in 20 years and has an annual coupon of $105. Each warrant gives the owner the right to purchase two shares of Bombardier stock at $20 per share.

Ordinary bonds (with no warrants) of similar quality are priced to yield 17 percent. What is the value of one warrant?

Solutions

Expert Solution

Bond Price:
It refers to the sum of the present values of all likely coupon payments plus the present value of the par value at maturity. There is inverse relation between Bond price and YTM ( Discount rate ) and Direct relation between Cash flow ( Coupon/ maturity Value ) and bond Price.

Price of Bond = PV of CFs from it.

Year Cash Flow PVF/ PVAF @17 % Disc CF
1 - 20 $      105.00                           5.6278 $        590.92
20 $   1,000.00                           0.0433 $          43.28
Bond Price $        634.20

As Coupon Payments are paid periodically with regular intervals, PVAF is used.
Maturity Value is single payment. Hence PVF is used.


What is PVAF & PVF ???
PVAF = Sum [ PVF(r%, n) ]
PVF = 1 / ( 1 + r)^n
Where r is int rate per Anum
Where n is No. of Years

How to Calculate PVAF using Excel ???
+PV(Rate,NPER,-1)
Rate = Disc rate
Nper = No. of Periods

One Bond = 50 Shares ( 25 warrants * 2 shares / warrant )

Share Price = Bond Price / 50

= $ 634.20 / 50

= $ 12.68

Share Price is $ 12.68


Related Solutions

A bond with 25 detachable warrants has just been offered for sale at $1,000. The bond...
A bond with 25 detachable warrants has just been offered for sale at $1,000. The bond matures in 15 years and has an annual coupon of $115. Each warrant gives the owner the right to purchase two shares of stock in the company at $10 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 16 percent. What is the value of one warrant?
A) A bond with 30 detachable warrants has just been offered for sale at $1,000. The...
A) A bond with 30 detachable warrants has just been offered for sale at $1,000. The bond matures in 20 years and has an annual coupon of $66. Each warrant gives the owner the right to purchase two shares of stock in the company at $56 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 9 percent. What is the value of one warrant? (Do not round intermediate calculations and round your answer to 2...
Vernon Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5)...
Vernon Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 800, $1,000 bonds with the warrants attached was $820,000. The market price of the Vernon bonds without the warrants was $720,000, and the market price of the warrants without the bonds was $80,000. prepare journal entry. please give step by step
Teal Corp issued $2,000,000, twenty-year, 6 percent bonds for $2,180,000. Each $1,000 bond has one detachable...
Teal Corp issued $2,000,000, twenty-year, 6 percent bonds for $2,180,000. Each $1,000 bond has one detachable warrant, each of which permits the purchase of one share of the corporation's common stock for $50. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corporation's securities had the following market values: 6% bond without warrants                                      0 .96 Warrants                                                                   $55 Paid in capital common stock                               $237,400 What accounts should Teal Corp credit to record...
Monty Corporation issued 1,800 $1,000 bonds at 103. Each bond was issued with one detachable stock...
Monty Corporation issued 1,800 $1,000 bonds at 103. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 99, and the warrants had a market price of $33. Use the proportional method to record the issuance of the bonds and warrants. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for...
2. Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable...
2. Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares of Ray's common stock. Total proceeds from the issue amounted to $240,000. The market value of each warrant was $2, and the market value of the bonds without the warrants was $196,000. The bonds were issued at a discount of (rounding the allocation percentage to two decimal places): a. $0 b. $800 c. $4,000 d. $33,898
You have just been offered a 12% bond for $1150. These bonds mature in 6 years....
You have just been offered a 12% bond for $1150. These bonds mature in 6 years. Find the required rate of return.
A firm has just issued a bond that has a face value of $1,000, a coupon...
A firm has just issued a bond that has a face value of $1,000, a coupon rate of 8 percent paid   semi-annually, and matures in 8 years.  The bonds were issued at a discount ($950.35) with a yield to maturity of 8.88%. Assume that 3 years from now, the bond trades to earn an effective annual yield to maturity of 10%.  At what price should this bond be trading for at the beginning of year 4?  
A 20-year bond with a face value of P5,000 is offered for sale at P3,800. The...
A 20-year bond with a face value of P5,000 is offered for sale at P3,800. The rate of interest on the bond is 7%, paid semiannually. This bond is now 10 years old (the owner has received 20 semiannual interest payments). If the bond is purchased for P3, 800, what effective rate of interest would be realized on this investment opportunity?
5. A bond has just been issued. The bond will mature in 8 years and has...
5. A bond has just been issued. The bond will mature in 8 years and has a yield to maturity of 10%. The bond’s annual coupon rate is 8% and the face value of the bond is $1,000. Coupons will be paid quarterly. a. Compute the bond’s duration using the basic duration formula, i.e., the Macaulay duration formula (DO NOT use Excel’s Duration function or the VBA function dduration). PLEASE USE EXCEL
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT