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Cuba inc just sold a bond with 40 warrants attached. the bonds have a 15 year...

Cuba inc just sold a bond with 40 warrants attached. the bonds have a 15 year maturity and an annual coupons of 11% and they were issued at thier )1000 par value. The current yield on similar straight bonds is 13%.what is the implied value of each warrant
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Answer #1

Valuation of warrant

Par value = $1,000

Coupon rate = 11%

Coupon on bonds is calculated below by using following formula:

Coupon = $1,000 × 11%

= $110

Annual Coupon payment on bond is $110

YTM on non warrants bond = 13%

Value of bond with warrant debt is calculated below in excel and screen shot provided below:

Value of bond with warrant is $870.75

So value of warrant is calculated below using following formula:

Value of warrants = Value of bond without warrant - Value of bond with warrants

= $1,000 - $870.75

= $129.25

Thus, value of warrant is $129.25.

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