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Warrants vs Convertible Bonds – Meaning & Differences

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Warrants vs Convertible Bonds


Warrants are financial assets giving the holder the right but not obligation to buy shares of common stocks directly from the issuing authority at a fixed price for a given period of time. Each warrant specifies the number of shares of common stock a holder can purchase at the exercise price at the expiration date. Some features of warrants are same as those of call options. From the view point of the holders call options and warrants like the same. But still there exists a significant difference in contractual features of them. Say warrants have long maturity period. Some warrants are same as the perpetuals having no expiration date at all. The basic difference between call options and warrants is that call options are issued by individuals and warrants are issued by the firms. When a warrant is exercised, a firm must issue new shares of stock. Each time a warrant is exercised, the number of shares outstanding increases. In case of call options is not necessary i.e., when a call option is exercised, there is no change in the number of shares outstanding. Warrants vs Convertible Bonds.

 Warrants vs Convertible Bonds

Convertible Bonds

A convertible bond is same as the bond with warrants. The major difference between convertible bonds and warrants is that warrants can be separated into distinct securities but convertible bonds are not. Convertible bonds are the fixed income securities which would be converted into common stocks after certain period of time. Therefore, the convertible bond givers the holder the right to exchange for it a given number of shares of common stock any time on or before the expiration date.

Warrants vs Convertible Bonds

A preferred stock can be converted into common stock. The convertible preferred stocks and convertible bonds are same except a convertible preferred stock has an infinite maturity date. The following vocabularies are applicable for convertible bonds.

◘    Conversion premium: The difference between the conversion price and the current stock price, divided by the current stock price.

◘    Conversion price: The dollar amount of a bond’s par value that is exchangeable for one share of stock.

◘    Conversion ratio: The number of shares per bond received for conversion into stock.

◘    Conversion value: The value a convertible bond would have if it were to be immediately converted into common stock.

◘    Straight bond value:  The value a convertible bond would have if it could not be.

Warrants and Convertible Bonds

Warrants and Convertible Bonds

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