Question

Thirty year maturity bonds have just been issued with 40 attached warrants, with an annual coupon of 10%, at their $1,000 par value. The current yield on similar straight bonds is 12%. What is the implied value of each warrant?

		$4.03
		$4.24
		$4.44
		$4.61
		$4.86

Answer 1

Bond's Market Value = PV of Coupon Payment + PV of Maturity Value

= [Periodic Coupon Payment * {(1 - (1 + r)^-n) / r}] + [Face Value / (1 + r)^n]

= [{10%*$1,000} * {(1 - (1 + 0.12)^-30) / 0.12}] + [$1,000 / {1 + 0.12}^30]

= [$100 * {0.9666 / 0.12}] + [$1,000 / 29.9599]

= [$100 * 8.0552] + $33.38

= $805.52 + $33.38 = $838.90

Bond with warrants are priced at par, its market value is $1,000.

Price per warrant = [Bond Price - Straight Price] / Number of Warrants

= [$1,000 - $838.90] / 40 = $161.10 / 40 = $4.03

So, 1st option is correct.