Consider a bond with an equity warrant. The warrant entitles the bondholder to buy 25 shares of the issuer at €50 per share for the lifetime of the bond. The bond is a 30-year zero coupon bond with a €1,000 par value that has a yield to maturity of i_€ = 5 percent. The price of the bond is €500. What is the value of the warrant?

Question

Quizplus · Accepted Answer

The bond's present value is calculated using the formula for a zero-coupon bond: PV = FV / (1 + i)^n. Here, FV = €1,000, i = 0.05, and n = 30. The calculated present value is €231.38. Since the bond price is €500, the difference of €268.62 is attributed to the value of the warrant. Therefore, the value of the warrant is €231.38.

Consider a Bond with an Equity Warrant