An investor has $1,000 that she is interested in investing in ABC stock, which is currently selling for $10 per share. ABC's warrants are selling for $7 per warrant. Each warrant entitles the holder to purchase three shares of ABC's common stock for $8 per share. The warrant premium is ________.

Question

Quizplus · Accepted Answer

The warrant premium is the difference between the market price of the warrant and the intrinsic value of the warrant. The intrinsic value of the warrant is the difference between the exercise price of the warrant and the current market price of the stock. In this case, the exercise price of the warrant is $8 per share, and the current market price of the stock is $10 per share. Therefore, the intrinsic value of the warrant is $2 per share. The market price of the warrant is $7 per share. Therefore, the warrant premium is $5 per share.

An Investor Has $1,000 That She Is Interested in Investing