What Is a Harmless Warrant?
Let me tell you directly: the term harmless warrant refers to a provision that requires you, as a bondholder, to surrender an existing bond if you want to purchase the same type of bond from the issuer. In simple terms, bond issuers attach harmless warrants to their bonds, meaning you have to swap your existing bond if you're looking to buy another one with similar features from the same issuer. These warrants act as a safety net for bond issuers, helping them keep their debt levels in check.
Key Takeaways
- A harmless warrant is a provision that requires a bondholder to surrender the bond back to the issuer if they buy another one with similar terms from the same issuer.
- Harmless warrants prevent the bond issuer from taking on too much debt.
- A harmless warrant does not prevent the holder from purchasing another bond with different terms from the issuer.
- Not all bonds have harmless warrants attached to them.
- Harmless warrants force investors to decide which bond terms are the most crucial to them and their investment goals.
Understanding Harmless Warrants
Warrants are derivative securities that give you the right—not the obligation—to purchase or sell a specific security at a specific price before the expiration date. They come in several forms, including harmless warrants.
A harmless warrant is attached to bonds and offered by bond issuers. If you buy a bond with a harmless warrant, you cannot purchase another bond from the same issuer with the same terms until you surrender the first one. This covers bonds with the same maturity date, yield, and principal amount. For example, you can't buy a $1,000 10-year bond from Company A without surrendering the first one you own with those exact terms.
Bonds represent debt for the issuer. You're lending the entity a sum of money for a period, in exchange for the principal plus interest at maturity. These add to the issuer's total debt. By issuing bonds with harmless warrants, entities control their debt levels. This way, you can't gain too much leverage over the issuer, and it prevents the issuer from facing a situation where they can't cover multiple called bonds.
One point to note is that not all issuing entities attach harmless warrants to their bond offerings.
Fast Fact
Harmless warrants are also called wedding warrants.
Special Considerations
If harmless warrants stop you from buying multiple bonds with similar terms from the same issuer, what if you want to buy different bonds from them?
These warrants don't prevent you from purchasing bonds with different terms from the same issuer. You can buy other bonds with varying maturity terms, yield rates, and principal amounts.
Keep in mind that most investors want to repeat investments due to favorable terms, so a harmless warrant forces you to decide which terms are most crucial. That is, unless you're willing to surrender the original bond to buy a new one with the same terms.
Important
Harmless warrants are not detachable, meaning they can't be separated from the underlying security. You can't sell the bond or warrant separately on the secondary market.
Harmless Warrant vs. Warrant
Remember, a harmless warrant gives you the right to purchase another bond at the same terms as the one it's attached to. However, it doesn't let you own two bonds with the same terms simultaneously. Instead, you must surrender the first bond to buy the second with identical terms.
A standard warrant is a derivative security that gives you the right to buy or sell another security at a specific time, without obligation. You purchase the warrant to gain the right to whatever action it specifies.
Are Bonds and Warrants the Same?
Bonds and warrants are not the same. Bonds are fixed-income investments that guarantee you the return of principal plus a set interest rate by a certain time. Warrants are derivatives that give you the right but not the obligation to buy or sell the underlying security at a certain price by expiration. Warrants can attach to bonds, providing benefits to both you and the issuer.
What Are Detachable Warrants?
Detachable warrants are derivatives attached to securities, allowing you to buy the underlying asset at a certain price within a period. As the name suggests, they can be detached from the asset and sold or traded separately on the secondary market. You can sell either the investment or the warrant and keep the other.
What Is a Penny Warrant?
A penny warrant is a warrant with an exercise price of one cent or another nominal amount.
Can You Sell Warrants?
You can sell a warrant if it's detachable. These can be removed from the underlying asset, like a stock, and traded on their own. If you detach it, you keep the asset but sell or trade the warrant on the secondary market, usually over-the-counter or through a broker.
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