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Types of bonds

Warrant bonds

A bond with option rights is called a warrant bond. For a limited time, it confers the right to buy equity securities, such as shares, of the bond issuer at a predetermined price (exercise price).

Warrant bonds differ from convertible bonds firstly in that the bond still exists after the option right has been exercised. Interest payments and redemption at the end of the duration are still the same as with ordinary bonds, but the option is no longer part of the bond. The second difference is that the warrant of a warrant bond can be traded separately.

The following stock-exchange listings are possible:

  • Bond cum option
  • Bond ex option
  • Option only

As far as the preferential subscription right, the yield and the anti-dilutive provisions are concerned, the conditions are the same as for convertible bonds.

Investing in warrant bonds can offer several different benefits. On the one hand, there is the potential for price gains in the event of rising share prices, while on the other hand the price risk is limited since a warrant bond is a conventional bond with additional rights in the form of options. However, ownership of the option alone needs to be considered separately. Depending on the terms and conditions, unattached options have enormous potential both for gains and losses.