A warrant is an option to buy a stated number of shares at a specified price over a given time period. Warrants are generally issued in conjunction with debentures (or sometimes preference shares) as "sweeteners". They are issued by financially weaker companies to attract investors.
7.1 FEATURES OF WARRANTS
(a) Exercise Price
The exercise price (which is the price at which holders of warrants can purchase common shares) remain constant over the life of the warrant.
(b) Exercise Ratio
The exercise ratio (which states the number of common shares that can be purchased at the exercise price per warrant) is usually 1:1.
(c) Expiry date
Warrants have an expiry date after which they cannot be exercised.
A warrant can either be detachable or non-detachable. Detachable warrants can be sold separately from the debenture (or preference share) to which it was originally attached. A non-detachable warrant cannot be sold separately from the debenture to which it was originally attached.
(e) Theoretical Value
The theoretical value of warrants depend on the market price of the ordinary shares. It is given by the following formulas:
Theoretical Value =(Market share price — Exercise Price) Exercise Ratio of warrant
When the share price is less than the exercise price, the warrants theoretical value will be zero. This is because warrants are options rather than contracts and therefore warrant holders will not exercise them if their value is negative.