Textbook Notes (363,019)
Canada (158,147)
Finance (37)
MGFC10H3 (13)
Derek Chau (13)
Chapter 25

Chapter 25 Notes

1 Page
Unlock Document

University of Toronto Scarborough
Derek Chau

Chapter 25 Warrants and Convertibles Notes251 Warrantswarrants are securities that give holders the right but not the obligation to buy shares of common stock directly from a company at a fixed price for a given period of timeeach warrant specifies the number of shares that the holder can buy the exercise price and the expiration datehow far the warrant price lies above the lower limit will depend on 1 the variance of stock returns 2 the time to the warrants expiration date 3 the riskfree rate of interest 4 the stock price and 5 the exercise price252 The Difference between Warrants and Call Optionsfrom the holders point of view warrants are similar to call options on common stocka warrant like a call option gives its holder the right to buy common stock at a specified pricewarrants usually have an expiration date though in most cases they are issued with longer lives than call optionsfrom the firms point of view however a warrant is very different from a call option on the companys common stockvital difference between call options and warrants is that call options are issued by individuals and warrants are issued by firmswhen a warrant is exercised a firm must issue new shares of stockeach time a warrant is exercised then the number of shares outstanding increases254 Convertible Bondsa convertible bond is similar to a bond with warrants the most important difference is that a bond with warrants can be separated into distinct securities but a convertible bond cannotgives holder the right to exchange for given number of shares of stock at any time up and including maturity date of the bonda share of convertible preferred stock is the same as a convertible bond except that it has no maturity date257 Why Are Warrants and Convertibles Issuedsome differences between convertible bonds and warrants are1the bond ratings of firms using convertibles are lower than those of other firms2convertibles tend to be used by smaller firms with high growth rates and more financial leverage3convertibles are usually subordinated and unsecured259 Summary and Conclusions1A warrant gives the holder the right to buy shares of common stock at an exercise price for a given period of time Typically warrants are issued in a package with privately placed bonds Afterward they become detached and trade separately2A convertible bond is a combination of a straight bond and a call option The holder can give up the
More Less

Related notes for MGFC10H3

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.