Question

Neubert Enterprises recently issued $1,000 par value 15-year bonds with a 7% coupon paid annually and warrants attached. These bonds are currently trading for $1,000. Neubert also has outstanding $1,000 par value 15-year straight debt with an 8% coupon paid annually, also trading for $1,000. What is the implied value of the warrants attached to each bond? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

As price = par value for bond 2 , YTM = bond 2 coupon rate

Price of bond 1 without Warrant =

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =15

Bond Price =∑ [(7*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^15

k=1

Bond Price = 914.41

Price of warrant = price of bond with warrant- price of bond without warrant

=1000-914.41=85.59