Warrant is long-term option

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Reference no: EM13885228

A warrant is a long-term option from a company that gives the holder the right to buy a stated number of shares of the firm’s stock at a specified price for a specified length of time. Generally, warrants are distributed with debt, and they are used to induce investors to buy long-term debt that carries a lower coupon rate than would otherwise be required. The exercise of warrants brings in additional funds to the firm.

A corporation decides to issue 10-year bonds to fund a necessary expansion. If they were straight bonds, they would carry an 10% annual coupon. However, the bonds with warrants can be sold with a 9% coupon. Thus, investors would be paying $900 in return for the 9% coupon, 10-year bond and 16 warrants.

What is the price of the 9% coupon bonds? Round your answer to the nearest cent.

Reference no: EM13885228

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