Warrants

Warrants are a form of option which is usually added to a corporate bond issue or preferred stock in order to sweeten the deal.

A warrant is a long dated option which allows the owner to participate in the capital gains (losses) of a firm without buying the common stock. In effect, the holder of a warrant has a leveraged play on the corporate common stock.

As a form of option, a warrant has an exercise price and an expiry date. The exercise price is the price at which the holder may convert the warrant into common shares of the issuer. The expiry date is the last date on which the warrant may be converted into common shares. Given that a warrant is generally issued to reduce the cost of a debt issuer, the expiry date is usually more than two years from issuance. This allows warrants to trade separately from the bond with which they were issued. Thereby providing the investor with a long dated option on a firm's common stock.

There is a draw back to warrants for those investors concerned with income. As an option, a warrant does not pay a dividend, and is subject to a certain amount of price compression as the underlying stock approaches or surpasses the exercise price. This is only a factor if the investor is purchasing the warrants when the common stock is trading near the exercise price.

Warrant holders have no voting rights until the warrants are converted into common shares. Upon conversion an active role may be taken in corporate governance. If the warrants provide for conversion into preferred shares, it is unlikely the holder will gain any influence into corporate governance upon conversion.

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