Detachable Warrant

Everybody likes twofers, right? Yeah, yeah, ask Ryan Lochte. Well, the detachable bond is a twofer in the exciting world of derivatives trading.

A detachable warrant is a type of derivative that is commonly attached to a debt security such as a bond. The warrant grants the right (but not the obligation) to purchase a certain number of shares of the debt issuer's security at a certain price and within a certain time frame. Up to this point, it's similar to a call option.

Here's where it gets weird, and not just Lochte weird. The warrant literally can be detached from the debt security by the holder and held or sold separately.

So let's say you hold a bond in Company X that came with a detachable warrant to buy 50 shares of Company X in the next five years at the price of $10 per share. While a bond is a pretty safe investment (it's basically an IOU), you wouldn't want to bet that Company X's shares will rise from today's lousy price of 50 cents to $10 per share in five years. So you decide to sell the shares to some chump who does...and hold onto the bond.