Convertible bonds and warrants are hybrid instruments that turn debt into equity. Convertibles give bondholders a right to exchange; warrants give the right to buy shares. Both blend fixed income with upside. Here is how they work.
Convertible Bonds
A bond that can be converted into company shares at a set ratio. It pays interest like a bond but offers equity upside — a 'two-way' instrument.
Warrants
Long-dated options issued by the company giving the right to buy shares at an exercise price. Warrants can be attached to bonds or issued separately.
Key Differences
- Convertible bond: debt you can swap for equity.
- Warrant: an option (no interest); exercise brings new shares.
Why Companies Use Them
They lower financing costs (convertibles pay less interest) and give investors upside while protecting capital. Dilution is the trade-off for existing shareholders.
FAQ
Which is riskier, a convertible or a warrant?
Warrants carry more risk (time value, no interest); convertibles offer bond downside protection.
Do they dilute shares?
Yes — conversion/exercise creates new shares.
Related: Cost of Capital and Financial Statements.