A warrant issued with a bond acts as a “sweetener” or “kicker” to make a bond issue more attractive to investors and to reduce the cost of the host issue. The cost of the bond issue is reduced because investors are usually willing to accept a lower return on the host security in exchange for a separately tradableasset. When the price of the underlying increases above the exercise price, the warrant’s holder can exercise the warrant and buy the underlying below the market price or sell the warrant in the market.
Subscription Warrants Compared to Covered Warrants
A sweetener, typically issued attached to bonds (bonds cum warrants)
Premium income for the issuer
Call or put option
Common shares of the warrant’s issuer
Equity of 3rd-party, index or baskets of stock
Impact on Capital of Underlying Issuer
Increases capital and shares outstanding
No effect on owners’ equity
Life of Instrument
Longer than covered warrants
Longer than traded options
A puttable warrantis a basket warrant giving the holder the right to sell (put) the underlying portfolio back to the issuer at a fixed cash redemption value. This feature limits the risk of investing in the warrant.
When the warrant’s exercise price is lower than the underlying’s market price, the warrant has intrinsic value, which is calculated using the following formula, where IV is the warrant’s intrinsic value, AP is the market price of a unit of the underlying, EP is the warrant’s exercise price (strike price), and n is the number of units of the underlying asset that can be bought with each warrant: