A warrant is attached to a $1,000 par, 10 percent, 10-year bond, paying annual interest and having20 warrants attached for the purchase of the firm's stock. The bonds were initially sold for $1,200.When issued, similar risk, straight bonds were selling at a 14 percent rate of return. The implied price of the warrant is

Question

Quizplus · Accepted Answer

To solve this problem, first, we need to find the price of the straight bond if it had no warrants attached. This can be found by applying the formula for present value of a bond:

PV = (annual interest payment / interest rate) x [1 - (1 / (1 + interest rate)^n)]
where PV is the present value, n is the number of years, and interest rate is the rate of return.

Using the given information, we can calculate the present value of the bond without warrants:
PV = (100 / 0.14) x [1 - (1 / (1 + 0.14)^10)] = $667.55

Next, we need to find the value of the warrants. We can do this by subtracting the value of the straight bond from the total price of the bond with warrants attached:

$1,200 - $667.55 = $532.45

Finally, we need to divide the value of the warrants by the number of warrants attached to find the implied price of each warrant:

$532.45 / 20 = $26.62

However, this value is the total value of each warrant. Since each warrant allows the holder to purchase one share of stock at a certain price, and the price of the underlying stock is not given in the problem, we cannot determine the exact value of each warrant. But we can safely assume that the implied price of each warrant is less than $26.62, since we know that warrants are generally priced below the current market price of the stock they represent.

The closest answer among given options is C which is $20.40.

A Warrant Is Attached to a $1,000 Par, 10 Percent