WARRANTSWarrants are securities that give holders the right,but not the obligation, to buy share of commonstock directly from a company at fixed price for agiven period of time. Each warrants specifies thenumber of share of stock that the holder can buy.The exercise price and the expiration date. Warrants are also refers to as equity kickersbecause they are usually issued in combinationwith privately placed bonds. Sometimes warrantscan be detachable.
Types of warrants•Warrants with Common Stock or Bonds•Debt WarrantsAllow investors to purchase additional debtWarranted bond usually has same coupon & maturity as host bond•Harmless Warrants:Variant of debt warrantsWarrant not exercisable until host bond becomes callableIf warrants exercised bonds will be called, so no increase in debt
Types of warrantsCovered WarrantsSynthetic warrants issued by third partye.g. Japanese debt warrants: BT issued identical warrants in localcurrency for Swiss investorsPut WarrantsRight to sell company’s common stockTypically used as part of share repo programe.g. company wants to hedge employee share optionsTakes in option premiumAsset WarrantsBased on any asset, e.g. currency, Nikkei 225
Features of Warrant•Expiry date•Exercise style•Deliverable or cash settled•Call or put warrants•Conversion ratio•Underlying instrument
Convertible BondsA convertible bond is a bond that gives theholder the right to "convert" or exchange thepar amount of the bond for common shares ofthe issuer at some fixed ratio during aparticular period. As bonds, they have somecharacteristics of fixed income securities.Their conversion feature also gives themfeatures of equity securities.
Features of convertible Bonds•Convertible bonds are debt instruments thatcan be converted into equity share of thecompany at a future date.•These security has feature of debt and equity.It pays periodic coupon interest just like anyother debt instrument.•At the time of redemption of bond theinvestor can choose to receive share of thecompany instead of cash..
Call optionA call option gives the holder the right, butnot the obligation, to purchase shares of aparticular underlying stock at a specified strikeprice with in specified period of time.
Difference between warrants and convertibles• Time Frame• Conversion• Further Investment• Investment Period
Difference between call option and warrants• Call option are issued by individuals and warrants are issued by firms• Each time warrants is exercised, the number of share outstanding increases. When call option is exercised, one investor gains and other loses. The number of share outstanding remains the same.
Difference between call option and convertibles• Call option gives the owner right to buy an asset at a fixed price during a particular time period. A convertible bond gives the holder the right to exchange it for a given number of share of stock at any time up to an including the maturity date of the bond.