Fundamentals of Financial Manageme...
Fundamentals of Financial Manageme...
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?
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.
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.
Excel Spreadsheet:
Therefore the present value of second bond issue is $726.14.
Determine the value of warrants of the second issue
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