Pierre Imports recently issued two types of bonds
Pierre Imports recently issued two types of bonds. The first issue consisted of 10-year straight debt with a 10 percent annual coupon. The second issue consisted of 10-year bonds with a 9 percent annual coupon and attached warrants. Both issues sold at their $1,000 par values. The company's stock is currently selling for $24.50 per share.
a. Calculate the implied value of the warrants attached to each bond.
The value of the warrant = PV of the 1% interest foregone
Interest foregone = ($1,000 × 10%) – ($1,000 × 9%) = $10
Number of Periods = 10
Rate = 10%
PV = [pic][pic]
= $61.45
b. What will happen to the value of the bond with warrants if the company's stock price increases? Why?
Warrants are the securities giving the holder a right to subscribe to a share or a bond at a given price and from a certain date. Therefore, the warrants have a fixed rate set for them to purchase the shares.
If stock prices increases, the value of bond with warrants will also increase as a result of increase in stock price that is attached with the bonds in the name of warrants.
c. What will likely happen to the value of the straight bond if the company's stock price increases? Why?
The value of the straight bond will not change as it has no relation with the stock price.
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