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 present value of the bond without the warrant is calculated using the formula for a zero-coupon bond: PV = Par Value / (1 + i)^n. Here, PV = €1,000 / (1 + 0.05)^30 = €231.38. Since the bond with the warrant is priced at €500, the value of the warrant is €500 - €231.38 = €268.62.

Consider a Bond with an Equity Warrant