Warrants by skmr


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Warrants by skmr

  1. 1. Warrants are call options that give the holder the right, but not the obligation, to buy shares of common stock directly from a company at a fixed price for a given period of time. Warrants tend to have longer maturity periods than exchange traded options. Warrants are generally issued with privately placed bonds as an “equity kicker”. Warrants are also combined with new issues of common stock and preferred stock, given to investment bankers as compensation for underwriting services.
  2. 2. When warrants are issued along with host securities and detachable are called Detachable Warrants In some cases warrants can be sold back to company before the expiry date they are known as Puttable Warrants NAKED WARRANTS are issued separately not with host securities
  3. 3.  Warrants makes the non convertible debentures and other debentures more attractive and acceptable.  Debentures along with the warrants are able to create their own market and reduce the company's dependence on financial institution's.  Since the exercise of the warrants take place at future date , the cash flow & the capital structure of company can be planed accordingly.
  4. 4.  The cost of debt is reduced if warrants are attached to it. Investors are willing to accept lower interest rates in the anticipation of enjoying the capital appreciation of equity value at later date  Warrants provide high degree of leverage to the investors. It can sell the warrants in the market or convert it into stocks or allow it to lapse  Warrants are liquid they are traded in stock exchanges
  5. 5. A convertible bond is similar to a bond with warrants. The most important difference is that a bond with warrants can be separated into different securities and a convertible bond cannot. The minimum (floor) value of convertible: Straight or “intrinsic” bond value Conversion value The conversion option has value.
  6. 6. The value of a convertible bond has three components: 1. Straight bond value 2. Conversion value 3. Option value
  7. 7. Stock Price Straight bond value Conversion Value = conversion ratio floor value floor value Convertible bond values Option value
  8. 8. Most convertible bonds are also callable. When the bond is called, bondholders have about 30 days to choose between: 1. Converting the bond to common stock at the conversion ratios. 2. Surrendering the bond and receiving the call price in cash.
  9. 9.  Theoretical value – theoretical value can be found out if we know the ordinary share s market price and warrants excise price  Warrants Theoretical value = ( share price - exercise price )* exercise ratio
  10. 10. Convertible bonds reduce agency costs, by aligning the incentives of stockholders and bondholders. Convertible bonds also allow young firms to delay expensive interest costs until they can afford them. Support for these assertions is found in the fact that firms that issue convertible bonds are different from other firms: The bond ratings of firms using convertibles are lower. Convertibles tend to be used by smaller firms with high growth rates and more financial leverage. Convertibles are usually subordinated and unsecured.
  11. 11. A reasonable place to start is to compare a hybrid like convertible debt to both straight debt and straight equity. Convertible debt carries a lower coupon rate than does otherwise-identical straight debt. Since convertible debt is originally issued with an out- of-the-money call option, one can argue that convertible debt allows the firm to sell equity at a higher price than is available at the time of issuance.
  12. 12. From the shareholder’s perspective, the optimal call policy is to call the bond when its value is equal to the call price. In the real world, most firms wait to call until the bond value is substantially above the call price. Perhaps the firm is afraid of the risk of a sharp drop in stock prices during the 30-day window. 
  13. 13. Convertible bonds and warrants are like call options. However, there are important differences: Warrants are issued by the firm. Warrants and convertible bonds have different effects on corporate cash flow and capital structure. Warrants and convertibles cause dilution to existing shareholder’s claims. Many arguments, both plausible and implausible, are given for issuing convertible securities. Convertible bonds lends the chance to benefit from risks and reduces the conflicts between bondholders and stockholders concerning risk.