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Hello!
In part b) it required to determine the coupon rate, where we can work on it by stating it as “x” (unknown figure) to the amounts given.
My question is why do we have to add the call value in year 0 and what does it mean putting it there?
Thank you.
It is because of the warrants, which are effectively call options that have a value at time 0 of 2241.
So the lender invests 10,000 now, but gets options which are worth now 2241 🙂
But why on earth would there be put options? The whole point of offering warrants is to make the debt more attractive to investors by giving them the possibility of buying shares at a future date at a fixed price (as is made clear in the question) 🙂
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