Warrant definition
/What is a Warrant in Finance?
A warrant is an option to purchase a certain number of a company's shares at a pre-determined price, within a defined time period. Warrants are frequently included in a bond issuance, so that the bond buyer acquires both the bond and its accompanying interest payments, as well as the option to profit from any increase in the company's share price. Warrants do not give their holder the right to receive dividends, and have no voting rights.
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When to Issue Warrants
Warrants are most commonly issued under the following circumstances:
Raising capital for a startup or high-risk company. Early-stage or high-risk companies may issue warrants to attract investors when traditional funding is hard to secure. Warrants act as an added incentive, giving investors the potential to profit if the company grows and its stock price rises, without immediately diluting ownership.
As part of a debt financing deal. Companies may attach warrants to bonds or loans to make the deal more attractive to lenders. This allows the company to offer a lower interest rate, since the warrant provides potential upside to the lender if the company performs well.
Payments to third parties. Warrants may also be issued to corporate outsiders as a form of compensation. This is especially common when the issuer has little cash to spare for a more traditional cash payment.