WARRANTS

Warrants are securities that give holders the right, but not the obligation, to buy share of common stock directly from a company at fixed price for a given period of time. Each warrants specifies the number of share of stock that the holder can buy. The exercise price and the expiration date. Warrants are also refers to as equity kickers because they are usually issued in combination with privately placed bonds. Sometimes warrants can 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 warrants

Covered WarrantsSynthetic warrants issued by third partye.g. Japanese debt warrants: BT issued identical warrants in local currency for Swiss investors

Put WarrantsRight to sell company’s common stockTypically used as part of share repo programe.g. company wants to hedge employee share optionsTakes in option premium

Asset 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 Bonds

A convertible bond is a bond that gives the holder the right to "convert" or exchange the par amount of the bond for common shares of the issuer at some fixed ratio during a particular period. As bonds, they have some characteristics of fixed income securities. Their conversion feature also gives them features of equity securities.

Features of convertible Bonds

•Convertible bonds are debt instruments that can be converted into equity share of the company at a future date.•These security has feature of debt and equity. It pays periodic coupon interest just like any other debt instrument.•At the time of redemption of bond the investor can choose to receive share of the company instead of cash..

Call option

A call option gives the holder the right, but not the obligation, to purchase shares of a particular underlying stock at a specified strike price 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.