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?

Solutions

Expert Solution

The Current Value of the Bond

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows


Variables	Financial Calculator Keys	Figures

Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$4115]	PMT	115
Market Interest Rate or Yield to maturity on the Bond [16.00%]	1/Y	16
Maturity Period/Time to Maturity [15 Years]	N	15
Bond Price/Current market price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $749.10.

The Total Warrant value = The Current Value of Bond – The Current Value of the Ordinary bond

= $1,000 - $749.10

= $250.90

Therefore, the Value of one warrant = Total Warrant value / 25 Warrants

= $250.90 / 25

= $10.04

Therefore, the Value of one warrant is $10.04

jeff jeffy answered 1 year ago

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