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Warrants

A warrant is very similar to an option. »Ê¹ÚÌåÓýapp term is normally used to denote an option to subscribe for shares, corporate bonds or other debt instruments. Thus when someone exercises a warrant, the exercise normally results in new financial instruments being created - unlike an ordinary call option, which generally confers the right to buy an existing asset. This means that the exercise of a warrant to subscribe for shares in a company will result in the dilution of existing investorsâ€� shareholdings.

You may come across warrants attached to fixed-rate bonds. A company may issue bonds with an equity warrant attached - a right to subscribe for shares in the issuing company. »Ê¹ÚÌåÓýappse bonds are similar to convertible bonds (see CFM11110), except that the warrant element can be separately traded. This means that an investor subscribing for the bond can make a profit if the company’s share price increases. In return, the investor will be prepared to accept a lower interest return on the bond. So a company can often borrow more cheaply by issuing bonds with equity warrants attached than by issuing straightforward corporate bonds.

A covered warrant is an exception to the general principle that the exercise of a warrant creates a new financial instrument. A covered equity warrant is really a long-dated call option over shares. It is issued by a third party with a substantial holding of the shares of the company in question, so that when an investor exercises the warrant, he or she will receive shares that already exist.