What Is Harmless Warrant?

A harmless warrant, also known as a wedding warrant, is a provision that requires the holder to surrender the bond back to the issuer if they buy another bond with similar terms from that issuer.

Key Takeaways

  • A harmless warrant, also known as a wedding warrant, is a provision that requires the holder to surrender the bond back to the issuer if they buy another bond with similar terms from that issuer.
  • Harmless warrant prevents the bond issuer from selling too much debt.
  • A harmless warrant does not prevent the holder from purchasing another bond with different terms from the issuer.

Understanding Harmless Warrant

Harmless warrant, like any other warrant, is a security that gives the holder the right (but not the obligation) to trade a specific amount of an asset at a specified time.

A harmless warrant is issued by an entity that issues bonds in order to control the amount of outstanding debt it issues. An investor who buys a bond with a harmless warrant, or wedding warrant, cannot purchase another bond from the same issuer with the same termsincluding maturity, yield and principal amountuntil the investor surrenders the first bond they purchased. In this way, an investor can't get too much leverage on the bond issuer and the issuer cannot get into a dangerous situation in which an investor calls multiple bonds that the issuer can't cover.

A harmless warrant does not prevent the holder from purchasing another bond with different terms from the issuer. The holder may purchase other bonds with different maturity terms, yield rate and principal amount. However, an investor generally wants to repeat an investment because the terms are favorable, so a harmless warrant forces an investor to decide which of the terms are the most crucial, unless they are willing to surrender the original bond to purchase a new one with the same terms.

Warrant vs Harmless Warrant

A warrant is a type of derivative security. It is a derivative because it gives the holder rights to act in some way with another security. A warrant gives the holder the right to buy or sell another security at a specific time, although the warrant holder does not have the obligation to exercise this warrant. The holder of the original security purchases the warrant to have the rights to do whatever the warrant delineates.

A harmless warrant gives the holder the right to purchase another bond at the same terms as the bond to which the harmless warrant applies. However, the harmless warrant does not give the holder the right to own two bonds with the same terms at the same time. Instead it, requires the holder to surrender the first bond to be allowed to buy the second bond with the same terms.