Convertible Bonds vs. Warrants - Meaning & Differences -BBALectures (2024)

Warrants vs Convertible Bonds

Warrants

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 the same as those of call options. From the viewpoint 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 a long maturity period. Some warrants are the same as the perpetualhaving 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 a call, options are not necessary i.e., when a call option is exercised, there is no change in the number of shares outstanding. Warrants vs Convertible Bonds.

Convertible Bonds

A convertible bond is the 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 that would be converted into common stocks after a certain period of time. Therefore, the convertible bond gives the holder the right to exchange for it a given number of shares of common stock any time on or before the expiration date.

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

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