A share warrant is a financial instrument that gives the holder the right to purchase a specific number of shares of a company's stock at a fixed price, within a certain period of time.
For example :
Company XYZ has issued bonds with warrants attached to them.
Each bondholder is entitled to receive a bond with a face value of Rs. 1,000 and the option to purchase 100 shares of Company XYZ stock for Rs. 20 per share. This means that if a bondholder exercises the warrant, they can purchase 100 shares of Company XYZ stock for Rs. 20 per share, regardless of the current market price of the stock.
The exercise price is the price at which the warrant holder can acquire the underlying securities. In this case, the exercise price is Rs. 20 per share, which is 15% higher than the stock price of Company XYZ when the bonds were issued. This means that the warrant holder would only exercise the warrant if the market price of the stock goes up to a level that makes exercising the warrant profitable.
The exercise price of the warrant frequently climbs on a set schedule, as specified in the bond indenture. This means that the exercise price will increase over time, making it more expensive for the warrant holder to purchase the underlying securities. This is done to provide an incentive for the warrant holder to exercise the warrant sooner rather than later.
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