A bond with 40 detachable warrants has just been offered for sale at $1,000. The
ID: 2654307 • Letter: A
Question
A bond with 40 detachable warrants has just been offered for sale at $1,000. The bond matures in 20 years and has an annual coupon of $68. Each warrant gives the owner the right to purchase two shares of stock in the company at $58 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 8 percent.
What is the value of one warrant? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
A bond with 40 detachable warrants has just been offered for sale at $1,000. The bond matures in 20 years and has an annual coupon of $68. Each warrant gives the owner the right to purchase two shares of stock in the company at $58 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 8 percent.
Explanation / Answer
Ordinary bond current value = pv(rate,nper,pmt,fv)
Ordinary bond current value = pv(8%,20,68,1000)
Ordinary bond current value = $ 882.18
Current Value of Bond with warrant = 1000
Warrant value = Current Value of Bond with warrant - Ordinary bond current value
Warrant value = 1000 - 882.18
Warrant value = $ 117.82
No of Warrant with a bond = 40
Value of one warrant = Warrant value /No of Warrant with a bond
Value of one warrant = 117.82/40
Value of one warrant = $ 2.95
Answer
Value of one warrant = $ 2.95
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