A warrant bond is a type of corporate bond which is sold along with a warrant which entitles its holder to buy shares in the issuing corporation at a predetermined exercise price.
The warrant and the bond can be traded or exercised separately.
Like other bonds, warrant bonds pay out interest on principal at a fixed rate in the form of coupon payments or allow investors to earn yields on the difference between their purchase price and their face value (zero coupon bonds). Warrant bond holders are entitled to cash in their bonds in exchange for their face value at the end of the bond term.
The primary difference between a warrant bond and a standard bond is the attached warrant which gives the bond holder the option of acquiring shares in the issuing corporation at a fixed, predetermined price. The bond holder is not obligated to exercise the warrant and buy the shares, but they have the contractual right to do so if they choose to.
The warrants attached to warrant bonds may increase in value as the value of the company’s stock which acts as their underlying asset increases.
Corporations typically offer warrant bonds to investors as an incentive to buy bonds which deliver below-average yields. For example, a young corporation which requires growth capital and cannot afford to pay high interest rates on loans may low-interest bonds as warrant bonds to encourage investors to buy the bonds in hope of achieving capital gains on the warrant or its underlying shares.
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