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Find the fair market value of the warrant

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Question - A non-callable bond has 10 years to maturity. Principal amount of $1,000. Coupon rate is $100 per year (payable at the end of the year but accrued daily).  The annual effective yield is 10%.

A callable bond has the same features but the effective yield is 11%. The callable bond is callable at par anytime prior to maturity with payment of accrued interest (in addition to par value).

The warrant allows the warrant holder to exchange warrant+callable bond for the above mentioned non-callable bond at anytime prior to maturity.

Find the fair market value of the warrant.

Reference no: EM132984609

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