Question

A bond with 20 detachable warrants has just been offered for sale at $1,000. The bond matures in 20 years and has an annual coupon of $48. Each warrant gives the owner the right to purchase two shares of stock in the company at $46 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 6 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.)

Value of one warrant $

Answer 1

Value of one warrant = $ 6.88 (2 decimals).

Step-by-step explanation:

Ordinary bond current value = pv(rate,nper,pmt,fv)

Ordinary bond current value = pv(6%,20,48,1000)

Ordinary bond current value = $ 862.36

Current Value of Bond with warrant = 1000

Warrant value = Current Value of Bond with a warrant - Ordinary bond current value

Warrant value = 1000 - 862.36

Warrant value = $ 137.64

No of Warrant with a bond = 20

Value of one warrant = Warrant value /No of Warrant with a bond

Value of one warrant = 137.64/20 = $6.882

Value of one warrant = $ 6.88 (2 decimals).