Pierre Imports recently issued two types of bonds. The first issue consisted of 10-year straight debt with

Question:

Pierre Imports recently issued two types of bonds. The first issue consisted of 10-year straight debt with a 10 percent annual coupon. The second issue consisted of 10-year bonds with a 9 percent annual coupon and attached warrants. Both issues sold at their $1,000 par values.

The company’s stock is currently selling for $24.50 per share.

a. Calculate the implied value of the warrants attached to each bond.

b. Discuss the advantages to the investor of purchasing bonds with warrants instead of straight bonds?

c. Discuss 2-3 advantages to the company of issuing a bond with warrants instead of straight bonds?

d. What will happen to the value of the bond with warrants if the company's stock price increases? Why?

e. What will likely happen to the value of the straight bond if the company's stock price increases? Why?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...