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    Warrants for exercise values

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    Orne Corporation issued bonds with detachable warrants several years ago. Each warrant allows the holder to purchase one share of stock at $30 per share. The stock has a beta of 1.6.

    a Calculate the exercise value of the warrants if the price of the underlying stock is $40.
    b. How much would an investor likely be willing to pay for the warrant over and above its exercise value ? Why?
    c. Would the investor likely be willing to pay more or less for the warrant if the stock had a beta of 1.0? Why?
    d. Is a warrant more similar to a call option or a put option? Why?
    e. Why might an investor prefer to buy warrants rather than the underlying stock?

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    Solution Summary

    Answers questions on warrants.