Curry Corporation is setting the terms on a new issue of bonds with warrants. Th

Question

Curry Corporation is setting the terms on a new issue of bonds with warrants. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000? a. 6.75% b. 7.11% c. 7.48% d. 7.88% e. 8.27%

Explanation / Answer

Total value = Straight-debt value (VB) + Warrant value = $1,000 VB = $1,000 -$200.00 = $800.00 Set N = 30, I/YR = 10, PV = -800, and FV = 1000. Then solve for PMT: $78.78 To get this payment on a $1,000 bond, the coupon rate must be: 7.88%

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