Unformatted text preview: ied price of each warrant $112
20 $5.60 Therefore, by purchasing Martin Marine Products’ bond with warrants attached
for $1,000, one is effectively paying $5.60 for each warrant.
The implied price of each warrant is meaningful only when compared to the
specific features of the warrant—the number of shares that can be purchased and
the specified exercise price. These features can be analyzed in light of the prevailing common stock price to estimate the true market value of each warrant.
Clearly, if the implied price is above the estimated market value, the price of the
bond with warrants attached may be too high. If the implied price is below the
estimated market value, the bond may be quite attractive. Firms must therefore CHAPTER 16 693 Hybrid and Derivative Securities price their bonds with warrants attached in a way that causes the implied price of
its warrants to fall slightly below their estimated market value. Such an approach
allows the firm to sell the bonds more easily at a lower coupon interest rate than
would apply to straight debt, th...
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