Bonds with warrants, Financial Management

Bonds with Warrants:

Warrants are usually attached with the bonds or preference shares to attract the investor. The objective is to induce the potential investors to subscribe to either bonds or preferred stocks, which give less attractive returns. The investor commits his funds with the expectation that he might be able to realize capital gains by selling the underlying stock of the firm whenever the warrants are exercised and exchanged for equity shares in some specified ratio.

Thus warrant is another variant of the call option wherein the holder has the right to purchase shares of the company at some predetermined price. Warrants can be exercised within a certain time limit, which can be of some years. They entitle the holders to subscribe to the shares of the company, which issued the warrants, at the end of or within certain time period (ranging from 5-10 years). The number of shares and the price at which these shares can be bought are determined at the time of issuing the warrants. The price at which the shares can be subscribed to is called exercise price. Warrants generally have a longer expiration period before they can be exercised compared to exchange traded options.

Often warrants can be traded independent of the instrument along with which they were issued. These warrants are called detachable warrants. Usually the exercise price is fixed over the entire life of the instrument and is greater than the market price of the stock at the time of issue. When bonds with detachable warrants are offered, the investors purchase them as a bundle of securities.

Warrants are usually issued when a firm acquires another firm and new shares are to be offered to the shareholders. These can also be issued when a company issues new shares and the underwriters are to be suitably paid.

The purchaser of a warrant does not have equity rights in that company. He has no voting rights and no dividends are paid for holding the warrant. Most of the warrants have stocks on over the counter markets.

 

Posted Date: 9/10/2012 8:00:43 AM | Location : United States







Related Discussions:- Bonds with warrants, Assignment Help, Ask Question on Bonds with warrants, Get Answer, Expert's Help, Bonds with warrants Discussions

Write discussion on Bonds with warrants
Your posts are moderated
Related Questions
Determine about the Systems based audit Systems based audit is useful as it would help identify risks within the processes in an organisation and review how adequate the contr

How to get cost differential when 100% done by a single party only.

Critical investment decisions may be taken based on the ratings offered by the credit rating agency. In order to ensure that the rating leads to good investment d

Potential drawbacks of divestment - There may be some loss of economies of scale. Fixed overheads would have a lower capacity to recover them. - Cash generated may not be

Who owns a credit union? Explain. The term Credit unions are owned by their members. While credit union members put money in their credit union, they are not exactly "depositin

What is the effect of stock (not cash) dividends and stock splits on the market price of common stock?  Why do corporations declare stock splits and stock dividends? Stock splits

Modified duration is used to determine the percentage change in the bond's prices for a 100 basis point (1%) change in the yield. The underlying assumption is tha

Suppose, you are working as an investment consultant in a consultancy firm and most of your clients are habitual investors, who are maintaining their own portfolios comprising of v

When the underlying stock becomes worthless, the percentage price declines the investors experience is given by, Percentage of Downside Risk=

At the end of 1922, your great grandfather (g.g.f.) established a trust fund to be used in order to help a later generation of the family obtain a university education. The ultimat