5.8.4.10. Rights and Warrants
A warrant is a financial instrument that gives the holder the right to purchase securities from an issuing company at a specific price in the future. When warrant holders execute their right to buy shares, it increases the number of shares outstanding in the market, thereby diluting the holdings of existing shareholders.
Warrants may be traded on the secondary market like stock options. Buyers of a warrant pay a premium for the right to purchase a set amount of stock at a stipulated price, called a strike price. Depending on the warrant’s terms, this right to buy may be exercised at stipulated times or at any time up to a stated termination date, after which the warrant will expire.
Warrants are frequently offered in conjunction with a new issuance of debt or equity as a sweetener to entice investors. For example, a bond issue may attach a warrant for the company’s stock, allowing the company to pay a lower yield on the bond issue.
Example: Suppose when you buy 10 bonds of Hot Box Lunches Corporation, you receive 10 warrants for Hot Box Lunches stock. The stock is currently