Question

Calmer Inc. plans to issue 20-year bonds with annual interest payments and with 20 warrants attached. Each warrant is expected to have a value of $0.50. A similar straight-debt issue would require an 12% coupon. What coupon rate should be set on the bonds-with-warrants so that the bond will sell for $1,000?

11.67%

11.73%

11.87%

11.99%

None of the above

Answer 1

Bond price will be returned after 20 years so difference between current price and PV of redemption price should be paid via coupon payments
PV of redemption price @ 20%	1000/(1+12%)^20
	103.6667651
Difference	=1000-103.66	896.34
PV of annual coupon payments
PV of annuity for making pthly payment
P = PMT x (((1-(1 + r) ^- n)) / i)
Where:
P = the present value of an annuity stream
PMT = the dollar amount of each annuity payment
r = the effective interest rate (also known as the discount rate)
i=nominal Interest rate
n = the number of periods in which payments will be made
896.34	P = PMT x (((1-(1 + r) ^- n)) / i)
896.34	= Annaul coupon * (((1-(1 + 12%) ^- 20)) / 12%)
896.34	= Annaul coupon * 7.47
Annual Coupon=	=896.34/7.47
Annual Coupon=	119.99
Initial Price	1000
Coupon rate=	119.99/1000	11.999%
Hence option D is correct