Question

Explain how convertible bonds and warrants are similar and different.

Short answer

Answer

Convertible bonds convey the choice of conversion into common stock at a predefined cost during a specific period. Stock purchase warrants are given with bonds or preferred stock as a prompting to the investor, since they grant the acquisition of the organization's common stock at an expressed price .

Step-by-step solution

Introduction to convertible bonds-

Convertible bonds are corporate bonds that can be converted for common stock in the issuing organization. Organizations issue convertible bonds to bring down the coupon rate on debt and to postpone dilution.

Convertible bonds and warrants are similar and different-

Convertible bonds and convertible warrants are similar in that they give the security holder a future option on the common stock of the company.

Convertible bonds and warrants are dissimilar in a way that convertible bonds addresses a debt obligation of the firm. When convertible bonds is converted to common stock, corporate debt will be decreased and the capitalization will not increment of the company. A warrant is distinct as it is not a valuable instrument on its own advantages, and also the overall capitalization of the company will be increased if it is exercised.