Describe how a new bond issue with warrants is valued.

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Describe how a new bond issue with warrants is valued.

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Describe how a new bond issue with warrants is valued.

Explanation & AnswerSolution by a verified expert

Explanation

If a bond is issued with warrants, the total price of the bond with warrants is higher than similar bonds without warrants. The values of the bonds and warrants are computed separately, but they are added since they are offered together in the initial issuance.

Verified Answer

Bonds issued with warrants are valued at the present value of cash flows (principal and interest) associated with the bond using the effective rate plus the present value of the expected gain from exercising the warrants attached.

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