Discuss how stock warrants are used
Stock Warrants
Firms sometimes issue bonds with stock warrants that have the same features as call options. The bond contract gives the holder the right to receive periodic interest payments and the principal amount at maturity. The stock warrant permits the holder to exchange the warrant and a specified amount of cash for shares of the firm's common stock. Attaching a stock warrant permits the firm to issue bonds at a lower interest cost than the market would require for bonds without such a warrant attached.
Firms may also issue preferred stock with stock warrants attached. Attaching a stock warrant
permits the firm to issue preferred stock with a lower dividend rate. The preferred shareholders benefit if the market price of the common stock increases. A conversion provision, previously discussed in the context of convertible preferred stock, also functions like a stock warrant. That is, a conversion provision has the same economic features as a call option.
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