Question

McGovern Enterprises is interested in issuing bonds with warrants attached. 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?

Answer 1

The multiple choices are:

6.64%

7.11%

7.48%

7.88%

8.27%

coupon rate is 7.88%

Step-by-step explanation:

In determining the coupon rate to set on the bond,we need to calculate the annual coupon of the debt using the pmt formula in excel

=pmt(rate,nper,-pv,fv)

rate is the coupon on similar straight debt issue

nper is number of coupons the bond would pay which is 30

pv =$1000-(value of 20 warrants)

pv=$1000-(20*$10)

pv=$800

fv id the face value of $1000

=pmt(10%,30,-800,1000)= 78.78

coupon rate=coupon amount/face value=$78.78/$1000=7.88%