When issued similar risk straight bonds were selling

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Unformatted text preview: s were initially sold for their $1,000 par value. When issued, similar-risk straight bonds were selling to yield a 12% rate of return. The straight value of the bond would be the present value of its payments discounted at the 12% yield on similar-risk straight bonds. Year(s) Payments (1) Present value interest factor at 12% (2) Present valuea [(1) (2)] (3) 1–20 $ 105b 7.469c $784 20 1,000 aFor 0.104d 104 Straight bond valuee $888 convenience, these values have been rounded to the nearest $1. b$1,000 at 10.5% $105 interest per year. cPresent value interest factor for an annuity, PVIFA, discounted at 12% for 20 years, from Table A–4. dPresent value interest factor for $1, PVIF, discounted at 12% for year 20, from Table A–2. eThe value calculated by using a financial calculator and rounding to the nearest $1 is also $888. Substituting the $1,000 price of the bond with warrants attached and the $888 straight bond value into Equation 16.1, we get an implied price of all warrants of $112: Implied price of all warrants $1,000 $888 $112 Dividing the implied price of all warrants by the number of warrants attached to each bond—20 in this case—we find the implied price of each warrant: Impl...
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This document was uploaded on 01/19/2014.

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