Question

Global Brothers issued two types of debt in 2019. The first were 12 year straight debt bonds offering a 10% annual coupon. The second was also a 12 year offering, but with an 8% coupon along with 5 warrants. Both issues sold at par value ($1 000). Global Brothers pays a tax rate of 40%

What is the implied value of the warrants attached?

Answer 1

Straight bonds offered a coupon of 10% and issued at par value. Issue pirce is equal to par value. So Yield to maturity of both bonds will be 10%

We will calculate straight value of second bond:

face value =1000

annual coupon = 1000*8% = 80

years to maturity (n) =12

YTM (i) =10%

Bond price formula = Coupon amount * (1 - (1/(1+i)^n)/i + face value/(1+i)^n

=(80*(1-(1/(1+10%)^12))/10%) + (1000/(1+10%)^12)

=863.7261635

Striaght value of second bond =863.73

issue price of bond with warrant = 1000

Implied value of warrants = Issue price - straight value of bonds

=1000-863.73

=136.27

So implied value of warrants attached is $136.27

value of 1 warrant = 136.27/5 =$27.254