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CHAPTER 17 Hybrid and Derivative Securities 761 P17-15 Implied prices of attached warrants Calculate the implied price of each warrant for each of the bonds shown in the following table. Price of bond with warrants attached Par value $1,000 1,000 500 1,000 Coupon rate (paid annually) 12.0% 9.5 Interest rate on equal-risk straight bond 13% 12 Years to maturity 15 10 20 20 Number of warrants attached to bond 10 30 $1,000 1,100 500 10.0 1,000 10.0 12 20 Evaluation of the implied price of an attached warrant Dinoo Mathur wishes to determine whether the $1,000 price asked for Stanco Manufacturing's bond is fair in light of the theoretical value of the attached warrants. The $1,000-par-value, 30-year, 11.5%-interest-rate bond pays annual interest and has 10 warrants attached for purchase of common stock. The theoretical value of each warrant is $12.50. The interest rate on an equal-risk straight bond is currently 13%. a. Find the straight value of Stanco Manufacturing's bond. b. Calculate the implied price of all warrants attached to Stanco's bond. c. Calculate the implied price of each warrant attached to Stanco's bond. d. Compare the implied price for each warrant calculated in part c to its theoretical P17-16 value. On the basis of this comparison, what assessment would you give Dinoo with respect to the fairness of Stanco's bond price? Explain. Warrant values Kent Hotels has warrants that allow the purchase of three shares of its outstanding common stock at $50 per share. The common stock price per share and the market value of the warrant associated with that stock price are shown in the table. P17-17 Common stock price per share $42 46 Market value of warrant s 2