Bonds are a standard method for corporations and governments to raise money. When an organization issues a bond, it guarantees a preset payment to buyers at a later date and highly rated bonds from financially sound companies are considered an extremely safe investment. Bonds with warrants offer something more, a chance to buy shares in the company at a guaranteed price.
Warrant Time Frames
Bonds with warrants give the bondholder the right to buy a certain number of shares at a fixed price for a specified period of time. A $1,000 bond, for example, could come with a warrant to buy 500 shares at $20 each. The bondholder can exercise the warrant any time during its life span, which could be a few years, or an indefinite future period. Usually the warrant runs at least five years.
Detaching Bonds from Warrants
In most cases, warrants are "detachable." This means that the bondholder can sell the bond and keep the warrants or sell the warrants and keep the bonds. This makes it possible to trade and invest in warrants independently from the bond market. It also makes warrants different from call options, another arrangement for buying stocks at a fixed price, because options can't be traded.
Features of Bonds With Warrants
Bonds with warrants often have lower interest rates than regular bonds, as they're offering a potentially lucrative deal on buying shares. The price of a warrant is typically 15 percent above the stock price at the time the bond is issued; if the stock never gets above the warrant price, the bondholder can let the bond expire without any penalties for not buying.
Minimum Value Considerations
If the price of the stock rises above the warrant, the difference gives the bond a minimum value. If the warrant is for a purchase at $50 and the stock sells at $75, the warrant's minimum value is $25. If the warrant has a few years left to run and investors believe the stock could rise higher, it may trade for more than $25.
Benefits for Bond Buyers
Warrants with bonds benefit the buyer because they offer a chance to diversify. Instead of just buying bonds, the buyer has a chance to invest in stock from the same company. This benefits corporations because they can offer a more attractive investment than pure bonds, which can increase the bond sales.