Reynolds Industries Is Planning to Issue Bonds with Warrants

question 23

Multiple Choice

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%

---

Definitions:

Compounded Daily

Refers to the method of calculating interest where the accumulated interest is added to the principal sum every day.

Interest

The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.

Deposit

A sum of money placed into a bank account or given as initial payment or security for the purchase of an item.

Compounded Daily

The process of calculating interest on both the initial principal and the accumulated interest from previous periods on a daily basis.