Question 2. (20 points) Pierre Imports recently issued two types of bonds. The f

Question

Question 2. (20 points) Pierre Imports recently issued two types of bonds. The first issue consisted of 10-year straight debt with a 9 percent annual coupon. The second issue consisted of 10-year bonds with a 8 percent annual coupon and attached warrants. Both issues sold at $1,000 par. The company's stock is currently selling for $27.50 per share. a. Calculate the implied value of the warrants attached to each bond.

b.   Discuss 3 advantages to the investor of purchasing bonds with warrants instead of straight bonds?

c. Discuss 3 advantages to the company of issuing a bond with warrants instead of straight bonds?

.

d. What will happen to the value of the bond with warrants if the company's stock price increases? Why?

e. What will likely happen to the value of the straight bond if the company's stock price increases? Why?  

Explanation / Answer

Number of Periods = 10

Rate = 10%

PV = 10 *( 1- 1/ (1.10)^10)/ 0.10 = $61.45

2.

Warrants are the securities embedded with bond which gives holder the right to subscribe to a bond or a share at a given price from a certain date.

Warrants have fixed rate to purchase the shares. Therefore ,if stock price increases,the value of both bond and warrants will increase as a result of increase in stock price that is embedded with the bond in the name of warrants.

3.

The value of the straight bond will not change as it has no relation with the stock price.

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