What are bonds with warrants?

Bonds with warrants are a kind of bond that comes with a special bonus. When a company sells these bonds, they include “warrants” as an extra. Warrants are kind of like a coupon that lets you buy more of the company’s stock later on, if you want. These warrants can sometimes be split off from the bond and sold separately.

Why do companies sell bonds with warrants?

Companies like selling bonds with warrants because it helps them get money for a cheaper price overall. See, when you buy the bond and the warrant together, the company doesn’t have to pay as much interest on the bond. That’s because the warrant is kind of like a little present that makes the bond more attractive to buy.

How do the bonds work?

These bonds can be sold using different types of money, like dollars, euros, yen, or whatever the company chooses. They are usually sold at their “par value,” which just means the original price they’re supposed to be worth. The bond also has a lifespan called its “maturity,” which can be anywhere from 1 year to 10 years.

The value of bonds with warrants

After you buy the bond, its value might go up or down depending on what happens with the warrants.

Intrinsic value

Part of the value depends on something called the “intrinsic value” of the warrants. That just means how much the warrants would be worth if you used them to buy stock right now. If the stock price goes higher than the price you’d have to pay using the warrant, then the warrant has intrinsic value.

Time value

The other part of the warrant’s value depends on how long you have until the warrant expires. This is called “time value.” Even if the stock price is below the warrant price right now, the stock might go up in the future before the warrant expires. So the more time left on the warrant, the more time value it has.

What the warrants are based on

The warrants attached to these bonds can be based on different things. A lot of times, the warrants are based on the price of the company’s own stock.

Stock warrants

Let’s say ABC Company issues bonds with warrants. The warrants might give you the right to buy ABC Company stock at a certain price, maybe $25 per share. If ABC’s stock goes up above $25, your warrants become valuable. The higher ABC’s stock goes, the more the warrants are worth.

Index warrants

Sometimes the warrants are based on a big group of stocks together, called an “index.” Instead of being tied to one company’s stock, these warrants are tied to the performance of a whole bunch of companies.

The most famous index in the US is the S&P 500. Let’s say you have warrants based on the S&P 500 index, and they allow you to make money if the S&P 500 goes up 10% or more. If the overall index rises enough, your warrants become more valuable.