Question

When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price of the (embedded) warrants. If it increases the exercise price, will the cost of debt go up or down? Explain the effect step by step, thus what happens to the Time Value Premium if it increases the exercise price, then explain the impact of the Time Value Premium on…, etc.

Answer 1

Warrants are an option that are issued with the bonds and which provide with an opportunity to the holder to convert those securities into Stock at a particular point of time in future.

there are two elements which are associated with the warrants the one is the intrinsic value and the other is the time value factor, because it would be treated like an option when the value of the share price goes up the value of the option would also go up because the warrant would act like a call option, and since the value of the underlying stock has gone up, the value of the option will also go up.So, a warrant holder can exercise their right at a low price and get the shares of high value or they can also do selling of the warrant at advantages price to gain from.

Time value of warrant could be associated with the maturity period as there is more time left to exercise the option, the value of warrant in respect to time value of money would be higher, and when there is lesser time left to exercise the option the time value of the warrant would be lower because there is lesser time left to exercise the option.