The premium which is largest when the straight and

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Unformatted text preview: traight and conversion values, thus resulting in a market premium. The premium, which is largest when the straight and conversion values are nearly equal, is due to the attractive gains potential from the stock and the risk protection provided by the straight value of the convertible. LG4 Explain the basic characteristics of stock purchase warrants, the implied price of an attached warrant, and the values of warrants. Stock purchase warrants enable their holders to purchase a certain number of shares of common stock at the LG5 700 PART 6 Special Topics in Managerial Finance specified exercise price. Warrants are often attached to debt issues as “sweeteners,” generally have limited lives, are detachable, and may be listed and traded on securities exchanges. Warrants are similar to stock rights, except that the life of a warrant is generally longer than that of a right, and the exercise price of a warrant is initially set above the underlying stock’s current market price. Warrants are similar to convertibles, but exercising them has a...
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This document was uploaded on 01/19/2014.

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