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A company recently issued $1,000 par value 10-year bonds with a 5% coupon paid annually with...

A company recently issued $1,000 par value 10-year bonds with a 5% coupon paid annually with warrants attached. These bonds are currently trading for $1,000. The company also has outstanding $1,000 par value 10-year regular debt with an 8% coupon paid annually, also trading for $1,000. What is the implied value of the warrants attached to each bond?

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Answer #1

The implied value of the warrants :

Implied value of warrants = Bond price - Value of coupons - Value of Par
Implied value of warrants = P - C * (1 - (1+r)^-n )/ r     - Par / (1+r)^n
Implied value of warrants = 1000 - 50 * (1 - (1+ 0.08)^-10 )/ 0.08    - 1000 / (1+0.08)^10
Implied value of warrants = 1000 - 50 * (1 - 1/2.158925 )/ 0.08    - 1000 / 2.158925
Implied value of warrants = 1000 - 335.50    - 463.2   = 201.30
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