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hi John,
why is the price of warrants deducted from 10000 and shown as benefit accruing immediately? why are the present value of interest payments = 7759 instead of full 10000?
There is no question with the name Alaska Savage in the June 2009 exam.
The Black Scholes formula gives the current value of the warrants (just as usually we use it to get the current value of options).
Therefore the net cost to the lender is the 10,000 less the value of the warrants, and the coupon rate will be whatever interest rate makes the PV of the interest payments and redemption equal to the net value.
(I would not worry too much about this question. It was set by the previous examiner who was removed because too many of his questions were ridiculous. For that reason BPP do not even include it in their Revision Kit 🙂 The current examiner (who started in 2010) sets much more sensible questions.)
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