A bond with 10 detachable warrants has just been offered for sale at $1,000. The

Question

A bond with 10 detachable warrants has just been offered for sale at $1,000. The bond matures in 30 years and has an annual coupon of $50. Each warrant gives the owner the right to purchase two shares of stock in the company at $59 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 7 percent.

What is the value of one warrant? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

A bond with 10 detachable warrants has just been offered for sale at $1,000. The bond matures in 30 years and has an annual coupon of $50. Each warrant gives the owner the right to purchase two shares of stock in the company at $59 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 7 percent.

Explanation / Answer

Current value of the ordinary bond = pv(rate,nper,pmt,fv)
= pv(7%,30,50,1000) Par value or face value is the assumption
= $ 751.82

value of warrant = Current Value of Bond with warrant -current value of  Ordinary bond
Warrant value = 1000 - 751.82 = $248.18

No. of Warrant with bond = 10
one warrant's value = Warrant value /No. of Warrant with bond
Value of one warrant = 248.18/10 = $24.818
Therefore, value of one warrant = $ 24.82

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