Upstate Water Company just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

Question

Quizplus · Accepted Answer

The implied value of each warrant is $3.76. This is calculated by dividing the difference between the current yield on similar straight bonds and the yield on the convertible bond by the number of warrants attached to each bond. In this case, the difference between the current yield and the yield on the convertible bond is 3%, and there are 50 warrants attached to each bond. Therefore, the implied value of each warrant is $3.76.

Upstate Water Company Just Sold a Bond with 50 Warrants