A warrant is attached to a $1,000 par, 10 percent, 10-year bond, paying annual interest and having 20 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

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First, we need to calculate the price of the straight bond with similar risk and a 14% rate of return:

PV = 100 x (1 - 1/(1+0.14)^10)/0.14 = $667.45

Next, we need to determine how much of the initial $1,200 price of the bond is attributed to the warrants:

$1,200 - $667.45 = $532.55 for the value of the warrants

Since there are 20 warrants attached to the bond, each warrant has an implied value of:

$532.55 / 20 = $26.63

However, the question is asking for the implied price of the warrant, not its value. To calculate the price, we need to divide the implied value by the number of warrants per bond:

$26.63 / 20 = $1.32 per warrant

Finally, we need to add the price per warrant to the bond price to get the implied price of the bond with warrants:

$667.45 + $1.32 = $668.77

Therefore, the implied price of the warrant is $20.40 (20 warrants x $1.32 per warrant).

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