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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

A company has issued warrants to a bank alongside a debt issue. Which statement about the warrants is correct?

A warrant gives the holder the right but not the obligation to subscribe for new company shares at a set price. When exercised, the holder pays cash and new shares are issued, unlike a convertible bond where debt is swapped for shares.

  1. AThey give the holder the right, but not the obligation, to subscribe for new shares at a fixed price, and exercise brings fresh cash into the companyCorrect
  2. BThey oblige the holder to buy existing shares from the company at a fixed price
  3. CThey give the holder the right to receive a fixed dividend before ordinary shareholders
  4. DThey are exercised by exchanging the debt for shares, so no cash is raised
  5. They give the holder voting rights on issue, before exercise

Explanation

A warrant is a long-dated call option on new shares issued by the company. On exercise the holder pays the exercise price, so cash is raised and shares are newly created. Option D describes a convertible bond, not a warrant.

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