shares at aspeoifed price that is generally warrants ane long-m options to buy a

Question

shares at aspeoifed price that is generally warrants ane long-m options to buy a stated number of common attached to debt issues Warrants are attached to debt in hopes of enticing investors to buy wer coupon, long-term debt, because warrants give investors the chance to profit from the firm's upside potential Warants are lice long-serm O cal options O Put options Stay Swift Corp. is issuing new seven-vear bonds with 9 warrants attached to each $,00o par value bond. Stay Swift Corp. wanted to issue the bonds at par, but a straight-debt bond nithout warants) would have required a 13.40%coupon rate. Instead, the attached warrants allow stay swift Cprp. to issue the bonds at par with a 8.04% coupon, caculate the straign value of the bond and the value of each warant in the following table (Note: Asume that the compeny pays annual coupons) what s the straipht value of the bond what is the value of ach warrant The consensus opinsion of analysits s that Sty Swift Copndeec the marns that itached toits bonds According to the analysts, is the coupon rate on Stay Smn CorpiNson tooo? O Too high O Too low Consider the following statement abour wa werrants combined with deot instruments thatcaemioved bythhlde andsold in he econdry separetely are caled detacheble warras True or fase: The preceding stement is correct

Explanation / Answer

Ans : Warrants are giving a right but not an obligation to buy the underlying equity at fixed price before expiry date.

So, it acts as a long term call option.

As the bond to be issued at par value that means the value of the bond (straight ) should be = 1000, discount rate = coupon rate = 13.40%

Now, in case if warrants are attached, the value of bond can be calculated :

So, Value of Bond with warrants = $449.80

Value of 19 warrants connected with each = 1000-449. 80 = $550.20

Value of each warrant = 550.20/19 = $28.96

If the analyst are saying that the warrants are undervalued, i.e. value of bond with warrants is too high and hence coupon is on higher side for warrant bonds.

Detachable warrants definition is true. As warrants attached with debt security can be sold seprately .

Year(t) 1 2 3 4 5 6 7 Coupon 8.04 8.04 8.04 8.04 8.04 8.04 1008.04 Rate 13.40% 13.40% 13.40% 13.40% 13.40% 13.40% 13.40% Discount rate 0.881834 0.881834 0.881834 0.881834 0.881834 0.881834 0.881834 Discount rate ^t 0.881834 0.777632 0.685742 0.604711 0.533255 0.470242 0.414676 PV 7.089947 6.252158 5.513367 4.861875 4.287368 3.780748 418.0097 Total 449.7952

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