Chapter 20, Problem 2P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# WARRANTS Rubash Company recently issued two types of bonds. The first issue consisted of 20-year straight (no warrants attached) bonds with a 9% annual coupon. The second issue consisted of 20-year bonds with a 6% annual coupon with warrants attached. Both bonds were issued at par ($1,000). What is the value of the warrants that were attached to the second issue? Summary Introduction To Determine: The value of warrants of the second issue. Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock. Explanation Determine the interest rate for the first bond issue Using a excel spreadsheet and excel function =RATE, the interest rate for the first bond issue is determined as 9%. Excel Spreadsheet: Therefore the interest rate for the first bond issue is 9%. Determine the present value of second bond issue Since both the bonds are traded at par, the interest rate of this bond will be 9%. As the first bond issue is traded at par. Using a excel spreadsheet and excel function =PV, the present value for the second bond issue is determined as$726.14.

Therefore the present value of second bond issue is \$726.14.

Determine the value of warrants of the second issue

ValueāofāWar

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