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Hi,
(B) Estimate the coupon rate that would be required by the lenders if they wanted 13% return rate on their investment.
Please why was the call value of $2,248 deducted from the market value of the loan note of $10,000? I need explanation. Thanks
Without the warrant, the investor would pay out 10,000 for the note and the get interest each year plus repayment at the end.
With the warrant, the receipts will be the same, but although they still have to pay out 10,000 they receive the warrant which is worth 2,248.
So the real net cost to them of the investment is 10,000 – 2,248(This does not mean they will sell the warrant, but because it does have value, only the balance of the amount is effectively earning the interest on the bond)
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