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Warrant 1.
A negotiable security, often initially attached to a bond or share issued by a company in a financing transaction, that gives the holder the right, but not the obligation, to buy a specific number of shares or bonds that have yet to be issued by the company, under conditions, within a timeframe and at a price specified at the time of issue, whether or not the security is still attached to the issued bond or share.
(1) Warrants are distinguished based on the nature of the underlying security that the holder has a right to buy, i.e. share purchase warrants and bond warrants. Bond warrants are most often attached to a bond while share purchase warrants are attached either to a bond, a preferred or common share, or a unit made up of several securities. When the warrant is not attached to another security, the term naked warrant is used.
(2) Unlike warrant 2., warrant 1. relates to the creation of new shares or bonds and the warrant issuer is also the issuer of the underlying securities. Warrant 1. gives the holder the right to subscribe for the underlying securities while warrant 2. gives the holder the right to buy (in the case of a call warrant) or sell (in the case of a put warrant). Finally, warrant 1. is an incentive, used to make the bond or share to which it is initially attached more attractive.
(3) Warrants are most often detached and traded separately. At the time of issue, their exercise price is usually higher than the price of the underlying.
Synonyms and variations
- Corporate warrant
- Naked warrant
- Subscription warrant 1.
- Traditional warrant