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 give bond investors the chance to profit from the firms upside potential, leading some to compare warrants to a long-term call option. However, some factors distinguish warrants from call options. Which of the following statements about their differences is correct?

-Exercising call options can lead to the dilution of existing shareholders value.

-Exercising warrants can lead to the dilution of existing shareholders value.

Petroxy Oil Co. is issuing new five-year bonds with 17 warrants attached to each $1,000 par value bond. Petroxy Oil Co. wanted to issue the bonds at par, but a straight-debt bond (without warrants) would have required a 11.00% coupon rate. Instead, the attached warrants allow Petroxy Oil Co. to issue the bonds at par with a 6.60% 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.)

What is the straight value of the bond? _______

What is the value of each warrant? _________

The consensus opinion of analysts is that Petroxy Oil Co. undervalued the warrants that it attached to its bonds. According to the analysts, is the coupon rate on Petroxy Oil Co.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