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?                     (Points : 20)                 

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% --ANSWER

e. 8.27%

Total value = straight debt value + warrant value $1,000 = V + 20 ($10) V = $800

Solve for PMT = ?

N I/YR PMT FV PV $ 30 0.1 78.78 1000 -800

Coupon Rate = $78.78/$1000 = 7.88%

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