1.7.2 - CHARACTERISTICS OF WARRANTS

What is a warrant?

A certificate granting its owner the right to purchase securities from the issuer at a specified price (normally higher than the current market price) as of the date of issue of the warrant.

A tombstone for a new bond issue announces that 5-year warrants to purchase shares of the company's common stock at $75 are attached to the bonds. The current market value of the company's stock is $45. For what reason were the warrants attached to the bonds by the issuer? A) To improve the marketability of the bond issue. B) To make the bonds convertible into the issuer's common stock. C) To decrease the dilution of the current shareholders. D) To increase the dilution of the current shareholders.

A) To improve the marketability of the bond issue. Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues. Dilution may occur at the time the warrants are exercised (if ever), but this would not be a reason for their issuance. A warrant has nothing to do with the bond's convertibility into the underlying common stock. Reference: 1.7.2.1 in the License Exam Manual

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation? A) Increase in earnings per share. B) Reduction of the debt securities' interest rate. C) Dilution of shareholders' equity. D) Reduction of the number of shares outstanding.

B) Reduction of the debt securities' interest rate. Usually, a warrant is issued along with a debt instrument, an enhancement that allows the issuer to offer a slightly lower rate of interest. Reference: 1.7.2 in the License Exam Manual

Which of the following securities CANNOT pay a dividend? A) Class B common stock. B) Warrant. C) ADR. D) Convertible preferred stock.

B) Warrant. Warrants represent long-term options to buy stock at a fixed price, and, like options, cannot pay dividends. Reference: 1.7.2 in the License Exam Manual

Why is the long-term nature of a warrant attractive to speculators?

Because of the leverage it offers. Warrants also allow issues to offer bonds or preferred stock at an interest or dividend rate lower than the market rate because the issuer is offering investors something extra: the long-term right to buy stock at a fixed price.

Which of the following statements regarding warrants are TRUE? I. They pay dividends. II. They are debt securities. III. They allow for the purchase of common stock at a fixed price. IV. They are equity-equivalent securities. A) I and II B) II and IV C) III and IV D) II and III

C) III and IV Holders of warrants have the right to buy stock from the issuer at a stated price for a specific time period. Warrants are considered equity-equivalent securities. They do not pay dividends which are only paid to stockholders, and the owner of the warrant does not own the stock until the warrant is exercised. Reference: 1.7.2 in the License Exam Manual

TRUE OR FALSE? Unlike a warrant, a right is usually a long-term instrument, giving the investor the choice of buying shares at a later date at the exercise price.

FALSE Unlike a RIGHT, a WARRANT is usually a long-term instrument, giving the investor the choice of buying shares at a later date at the exercise price.

Why are warrants offered to the public?

Offered as public sweeteners, or inducements, in connection with other securities, such as bonds or preferred stock, making those securities more attractive.

Which is short term, rights or warrants? Which is long term, rights or warrants?

Rights are short term. Warrants are long term.

What are the differences between Rights and Warrants?

TERM LENGTH Rights: short term Warrants: long term. ON ISSUANCE Rights: exercise price below market price. Warrants: exercise price higher than market price. ON TRADE Rights: may trade with or separate from the common stock. Warrants: may trade with or separate from the units. OFFERED AS Rights: to existing shareholders with preemptive rights. Warrants: offered as a sweetener for another security.

TRUE OR FALSE? Warrants typically have a life of five years, but in the past, perpetual warrants have been issued, which do not expire.

TRUE