What Is a Call Warrant?
A call warrant is a financial instrument that gives the holder the right to buy the underlying share of stock at a specific price on or before a specified date. Call warrants are often included in a new equity or debt offering from a company. A call warrant's purpose is to provide an added inducement to potential investors of the new stock or bond issue. Call warrants are usually detachable from the accompanying stock or bond certificate and trade separately on major stock exchanges.
A call warrant is also known as a warrant.
How Call Warrants Work
The price at which the warrant holder can buy the underlying stock is called the exercise price or strike price. This strike price is often set "out-of-the-money," i.e., it is fixed at a certain percentage above the current trading price of the underlying stock.
The inclusion of a call warrant feature may enable the company to lower the cost of its debt. The risk of potential equity dilution to the issuer, in the event of all the warrants being exercised, is more than offset by the additional equity capital available to the company at no additional cost, an especially important consideration during periods of severe stress in financial markets.
While a call warrant has a strike price and expiration date just like an option, there are some fundamental differences between the two. Warrants are issued by companies, while exchange-traded options are listed by an exchange. Warrants also have much longer expiration periods than options.