Bonds with Warrants

A bond with warrants is a type of investment that combines a regular bond with a warrant entitling the holder to subscribe to shares of the issuing company. Bonds with warrants are divided into detachable types, in which the bond and the warrant can be traded separately, and non-detachable types, in which they cannot be traded separately. At first glance, they look similar to convertible bonds, but while a convertible bond disappears and is converted into shares when the conversion right is exercised, a bond with warrants does not extinguish the bond even when the warrant is exercised. Also, unlike convertible bonds, which can be converted into new shares without any additional payment, exercising the warrant on a bond with warrants requires additional payment of the new share subscription funds. In addition, the warrant of a bond with warrants can itself be traded in the market without being exercised.

Now let us examine how issuing bonds with warrants affects the issuing company's financial statements.

1. At the time of issuance: Because a bond with warrants has the characteristics of both a bond and equity, issuing it increases assets (investment proceeds), liabilities (bond portion), and equity (warrant consideration) at the same time.

2. At the time of interest payment: Since interest is paid, assets decrease and liabilities increase.

3. At the time of warrant exercise: Additional investment for subscribing to new shares is paid in, so assets and equity increase. However, unlike with convertible bonds, the bond is not extinguished.

4. At the time of maturity redemption: Since the bond is repaid in cash, assets and liabilities decrease.

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Topics: Mezzanine,Exchangeable Bond,Convertible Bond
Up: Mezzanine
Link:: Public News
Category: Wiki/Economy