Question

last option is 19.03

Het A bond with 20 detachable warrants has just been offered for sale at $1,000. The bond matures in 15 years and has an annual coupon of $105. Each warrant gives the owner the right to purchase two shares of stock in the company at $15 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 17 percent. What is the value of one warrant? Multiple Choice $17.30 $32.70 $20.76 $15.57

Answer 1

Let's calculate the PV of bond's interest payments and redemption value at 17%
	Year	Annual coupon	Redemption value	Total cashflow	PV factor, 1/(1+17%)^t	Total cashflow
	1	$      105		$        105	0.85470085	$   89.74
	2	$      105		$        105	0.73051355	$   76.70
	3	$      105		$        105	0.62437056	$   65.56
	4	$      105		$        105	0.53365005	$   56.03
	5	$      105		$        105	0.45611115	$   47.89
	6	$      105		$        105	0.38983859	$   40.93
	7	$      105		$        105	0.33319538	$   34.99
	8	$      105		$        105	0.28478237	$   29.90
	9	$      105		$        105	0.24340374	$   25.56
	10	$      105		$        105	0.20803738	$   21.84
	11	$      105		$        105	0.17780973	$   18.67
	12	$      105		$        105	0.15197413	$   15.96
	13	$      105		$        105	0.12989242	$   13.64
	14	$      105		$        105	0.11101916	$   11.66
	15	$      105	$     1,000	$     1,105	0.09488817	$ 104.85
					Total PV	$ 653.93
		Without warrants, the bond would have been sold for $ 653.93
		So the value of 20 warrants	1000-653.93
		So the value of 20 warrants	$      346.07
		So the value of 1 warrant	346.07/20
		So the value of 1 warrant	$        17.30
		So the option 1 is the correct answer.