CHAPTER TWENTY-THREE WARRANTS AND CONVERTIBLES Many debt issues are either packages of bonds and warrants or convertibles. The warrant gives its owner the right to buy other company securities. A convertible bond gives its owner the right to exchange the bond for other securities. | Brealey-Meyers Principles of Corporate Finance Seventh Edition VI. Options 23. Warrants and The McGraw-Hill Companies 2003 Convertibles CHAPTER TWENTY-THREE WARRANT AN CONVERTIBLE 642 Brealey-Meyers Principles of Corporate Finance Seventh Edition VI. Options 23. Warrants and Convertibles The McGraw-Hill Companies 2003 MANY DEBT ISSUES are either packages of bonds and warrants or convertibles. The warrant gives its owner the right to buy other company securities. A convertible bond gives its owner the right to exchange the bond for other securities. There is also convertible preferred stock it is often used to finance mergers for example. Convertible preferred gives its owner the right to exchange the preferred share for other securities. What are these strange hybrids and how should you value them Why are they issued We will answer each of these questions in turn. WHAT IS A WARRANT A significant proportion of private placement bonds and a smaller proportion of public issues are sold with warrants. In addition warrants are sometimes sold with issues of common or preferred stock they are also often given to investment bankers as compensation for underwriting services or used to compensate creditors in the case of In April 1995 . Services a firm servicing the oil industry issued million warrants as partial payment for an acquisition. Each of these warrants allowed the holder to buy one share of . Services for 30 at any time before April 2000. When the warrants were issued the shares were priced at 19 so that the price needed to rise by more than 50 percent to make it worthwhile to exercise the warrants. Warrant holders are not entitled to vote or to receive dividends. But the exercise price of a warrant is automatically adjusted for any stock dividends or stock splits. So when in 1998 . Services split its stock 2 for 1 each warrant holder was given the right to buy two shares and the exercise price was reduced to 30 -h 2 per share.
