Debt with Warrants Attached
Like convertible bonds, debt with warrants attached are issued with a feature that allows the bondholder to purchase a given number of shares at a certain price. However, while the conversion feature is built into the price of a convertible bond, it is a separate component of a bond with a warrant attached.
With a convertible bond, at or before the maturity date the bondholder either receives the face value of the bond or the number of shares into which the bond is convertible. For a bond issued with warrants, the bondholder gets a straight bond, and also receives warrants giving the right to purchase shares at a given price. These warrants are usually detachable from the bond, meaning they can be sold separately if the bondholder no longer wants the option.
A $1,000 bond with warrants attached might sell for $1,050. If the interest rate on the bonds is 6%, the company’s effective cash interest payment relative to the funds raised is $60/$1050, or 5.7%. Of course, the company also faces equity dilution when the warrants are issued.
For more information, see all articles on: Financial Statement Analysis, Fixed income investments, Fundamental Analysis, Hybrid Securities, Investing in Stocks, Investing in bonds, Investment Returns, Ratio Analysis, Valuation See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
