Neubert Enterprises recently issued $1,000 par value 15-year bonds with a 6% coupon paid annually and...

Neubert Enterprises recently issued $1,000 par value 15-year bonds with a 6% coupon paid annually and warrants attached. These bonds are currently trading for $1,000. Neubert also has outstanding $1,000 par value 15-year straight debt with an 8% coupon paid annually, also trading for $1,000. What is the implied value of the warrants attached to each bond? Do not round intermediate calculations. Round your answer to the nearest cent.

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Expert Solution

The straight debt ( which doesn't have any warrants attached) paying 8% coupon is trading at its par value.

A straight debt trades at its par value only if YTM = coupon rate offered by the bond

Hence, it can be logically deduced that current YTM = 8%

Using the discount rate of 8%, let us deduce the market value of the 15 year bond which pays 6% coupon if it didn't have any warrants attached.

Attaching the calculations and formulas used :-

Hence, price of the bond (without considering warrants) = $828.81

Implied value of the warrant will be the difference between current market price of the bond and price of the bond (without considering warrants).

Hence, Implied value of the warrant = $ (1,000 - 828.81) = $ 171.19

jeff jeffy answered 9 months ago

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