Which set of circumstances would best ensure the price of a bond with attached warrants will increase given no change in the bond's credit quality or terms?
A)An increase in both the market rate of interest and the underlying stock price
B)A decrease in the market rate of interest and an increase in the underlying stock price
C)An increase in the market rate of interest and a decrease in the underlying stock price
D)A decrease in both the market rate of interest and the underlying stock price
E)A decrease in the market rate of interest with no change in the underlying stock price

Question

Quizplus · Accepted Answer

The price of a bond with attached warrants is affected by both the value of the underlying stock and the value of the bond itself. Generally, an increase in the value of the underlying stock will increase the value of the warrants and, therefore, the value of the bond as a whole. A decrease in the market rate of interest will also increase the value of the bond. Therefore, a decrease in the market rate of interest and an increase in the underlying stock price would be the best set of circumstances to ensure price increase, given no change in credit quality or terms. Option B meets both of these conditions.

Which Set of Circumstances Would Best Ensure the Price of a Bond