Call Warrant

  

This is what the cop is doing while he or she is sitting in their car after pulling you over for speeding. If you have a warrant, get ready for handcuffs. It's also a term related to certain provisions included in bond and preferred stock offerings.

Call warrants give the holder the right, but not the obligation, to buy a certain number of shares of common stock at a specific price and by a specific date. Also known as just a warrant, companies offer call warrants directly to investors or they might just hand them out to employees. But most of the time call warrants are attached to bonds or to preferred stock offerings. Unlike employee stock options that are granted at a price lower than the current market price, the exercise price of a call warrant is usually about 15% higher than the current market price.

What also sets them apart from other securities (or options) is that they can be detached from the bond or preferred stock, so one can sell the warrant and keep the bond, or vice versa. They also have a longer period before they expire (5+ years) than a regular call option, for example. While investors can take advantage of any price increases over that time period, the issuing company also wins, since they will now receive an infusion of capital from the sale of the common stock, which will help reduce the cost of the debt owed on the bonds.

So let's say Warrant We Great Inc. wants to issue a bond with a call warrant attached in order to attract more investors to the bond offering (otherwise known as sweetening the pot). They issue $50 million worth of bonds, each with a face value of $1,500, with a callable warrant attached. That warrant gives the buyer the right (but not the obligation) to purchase 200 shares of Warrant We Great at $30 a share over the next six years. The $30 price is above the current market price by about 15% but it has six years to go up.

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