Question

LPV Inc. wants to issue 20-year bonds with 15 warrants attached. The investment bankers estimate that each warrant will have a value of $15.00 and that its exercise price will be equal to $25. A similar straight-debt issue would require a 12% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000? *

1) 6.98%

2) 7.56%

3) 8.47%

4) 8.99%

5) None of the above

Answer 1

Answer is 8.99%

Bond price should be = 1,000 -15*15 = 775

At coupon of 8.99% bond price is equal to 775 as shown below

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (12%,20 periods)	$                         89.90	7.46944	$                671.50
Present value of bond face amount -Present value (12%,20 periods)	$                    1,000.00	0.10367	$                103.67
Bond price			$                775.17
Face value			$             1,000.00
Premium/(Discount)			$              (224.83)
Interest amount:
Face value	1,000
Coupon/stated Rate of interest	8.990%
Frequency of payment(once in)	12 months
Interest amount	1000*0.0899*12/12=		$                  89.90
Present value calculation:
yield to maturity/Effective rate	12.00%
Effective interest per period(i)	0.12*12/12=		12.000%

please rate.