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December 2009 Q 3 (b)
Fixed rate 5 year Loan Note of $ 10,000 repayable at par, carrying a warrant for 100 equity shares at an exercise price of $ 90 per sahre (current MV $ 85).
The coupon rate is calculated in the answer as follows:
T0:[Coupon repayment: $10,000+ call value: $ 2,241] -$ 7,759
T 1-5:100 * c%*3.517
T5: $ 10,000*0.543
Therefore, c = 6.6%
Would you please explain why the call value ($ 2,241) and 100 (may be number of equity shares) has been included in the Bond’s coupon calculation????We are using Value of Call because question says lenders are ready to offer finance against loan notes having warrant attached ,so repayment would be at par in form of shares….so value of shares using BSOP is $ 2234…
I think there is only value of call adjusted with initial investment ($ 10,000) and giving value of $ 7.7K
Each warrant is comprising 100 shares that’s why have been included in working
thanks. which means at T0, the leder pays (10,000) and adjusts call option value 2241 (or 2234 which ever) which is actually payable by the leder at T5 ? and gets the net cashflow of -7,795??? is that correct please!
Also, why the number of shares (100) are included in cashflow, why not the value of the 100 shares(100*90)??
Can you please explain furtherNo lender pays $ 10,000 for each bond (1600000/10000) and he will have warrant attached with each bond (means at repayment automatically lender will be able to own shares)…….and present value of each bond today is $ 2,241. You can say that lender has paid excercise price in form of bond i.e $ 10,000 for each bond.
U can say that at T0 it seems that lender is in loss but $ 2241 just value of call when lender gets share (5 years interests) price may change …U can also check this with 6.6% coupon rate so u will get interest also…
100 shares are included because we have multiplied $ 22.41 with 100 to get
$ 2,241…. U can solve with only 1*C% then $ 22.41 will be used and nominal par value will be 100 i.e ($100) @ T-0…………
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