Bond with attached warrants
A bond with attached warrants combines a debt claim with one or more share subscription rights. The bond's interest and repayment obligations continue according to its terms, while a warrant may allow its holder to subscribe for new shares at a specified exercise price before expiry. Warrants may be detachable or retained with the bond, depending on the agreement; exercising them normally raises additional equity cash for the issuer and can dilute existing shareholders. Evaluate the value and risks of both components, rather than treating the whole package as a warrant or assuming the debt converts automatically.
Worked example
A bond pays fixed interest and is issued with a warrant to buy one new share for $4. If the share price is $6, the warrant has $2 intrinsic value before costs and dilution effects, while the bond remains a separate debt claim under its terms.
Common mistake
Calling the $2 intrinsic value guaranteed net profit without deducting the warrant's acquisition cost, or assuming exercise automatically extinguishes the bond.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |