5. Warrants Warrants are long-term options to buy a stated number of common shares at a specified price that is generally attached to debt issues. Warrants are attached to debt in hopes of enticing investors to buy lower-coupon, long-term debt, because warrants give investors the chance to profit from the firm's upside potential. Warrants are like long-term: Put options Call options Randall and Arts Inc. is issuing new 19-year bonds with 31 warrants attached to each $1,000 par value bond. Randall and Arts Inc. wanted to issue the bonds at par, but a straight-debt bond (without warrants) would have required a 10.20% coupon rate. Instead, the attached warrants allow Randall and Arts Inc. to issue the bonds at par with a 6.12% coupon. Select the straight value of the bond and the value of each warrant in the following table. (Note: Assume that the company pays annual coupons.) Value What is the straight value of the bond? What is the value of each warrant? The consensus opinion of analysts is that Randall and Arts Inc. undervalued the warrants that it attached to its bonds. According to the analysts, is the coupon rate on Randall and Arts Inc.'s bonds too high or too low? Too low Too high Consider the following statement about warrants: Warrants combined with debt instruments that can be removed by the holder and sold in the secondary markets separately are called detachable warrants. True or False: False True 5. Warrants Warrants are long-term options to buy a stated number of common shares at a specified price that is generally attached to debt issues. Warrants are attached to debt in hopes of enticing investors to buy lower-coupon, long-term debt, because warrants give investors the chance to profit from the firm's upside potential. Warrants are like long-term: Put options Call options Randall and Arts Inc. is issuing new 19-year bonds with 31 warrants attached to each $1,000 par value bond. Randall and Arts Inc. wanted to issue the bonds at par, but a straight-debt bond (without warrants) would have required a 10.20% coupon rate. Instead, the attached warrants allow Randall and Arts Inc. to issue the bonds at par with a 6.12% coupon. Select the straight value of the bond and the value of each warrant in the following table. (Note: Assume that the company pays annual coupons.) Value What is the straight value of the bond? What is the value of each warrant? The consensus opinion of analysts is that Randall and Arts Inc. undervalued the warrants that it attached to its bonds. According to the analysts, is the coupon rate on Randall and Arts Inc.'s bonds too high or too low? Too low Too high Consider the following statement about warrants: Warrants combined with debt instruments that can be removed by the holder and sold in the secondary markets separately are called detachable warrants. True or False: False True
