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 at a price of $35 (the current price of the stock today). The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon.
a. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?

b. If the stock price rises by 5% per year and the convertibles are exercised after 10 years, what is the cost to the company of the bonds plus warrants package? 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 at a price of $35 (the current price of the stock today). The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon.
a. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?

b. If the stock price rises by 5% per year and the convertibles are exercised after 10 years, what is the cost to the company of the bonds plus warrants package?

Explanation / Answer

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%----correct answer
e. 8.27%

Bond maturity: Straight-debt yield: $1,000 30 10.0%

No. of warrants:

Value of warrants: 20 $10.00

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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