Reynolds Industries is planning to issue bonds with warrants. The bonds will hav

Question

Reynolds Industries is planning to issue 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%

E.) 8.27%

Explanation / Answer

This is the answer I got, am I not correct?

Value of one warrant = $10.00

Value of 20 warrants = $10.00 x $20.00 = $200.00

Value of debt portion = $1,000 - $200.00 = $800.00

Period = 30 years

Par Value = 1,000

Yield to Maturity = 10%

Coupon Rate = PMT function in excel = 78.78

The coupon 78.78/1,000=7.88%

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