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.