Calculate the initial cost of a warrant based on the following information. A bond with 5 warrants attached to it is issued with 3.5% coupon, 7 years in maturity, $1000 par value, and is sold for $1000. The going rate of interest is 5%.

a). Explain in your own wording your understanding of a warrant.

b). What does the warrant do for you as the bondholder in this example, if you exercise it?

c). Calculate the intrinsic value of the warrant.