Final answer:
Attaching warrants to a bond issue typically permits early bond redemption. Warrants offer the holder the right to buy company stock at a preset price, serving as an incentive for investors to purchase the bonds by providing potential equity participation.
Step-by-step explanation:
Attaching warrants to a bond issue usually permits early bond redemption. Warrants are options issued by a company that give the holder the right to purchase the company's stock at a specific price before a certain date. When a company issues bonds, they are taking on debt and are obligated to make periodic interest payments to bondholders.
By attaching warrants to the bonds, the company incentivizes investors by offering the potential for equity participation. If the company's stock performs well, the investor can redeem the warrant and purchase the stock at a price that may be lower than market value, potentially realizing a significant profit.
A company may choose to access financial capital through various means, including borrowing from a bank, issuing bonds, or issuing stock. Whereas issuing stock involves selling off company ownership and becoming responsible to a board of directors and shareholders, issuing bonds allows the company to maintain control of its operations.
However, the company commits to scheduled interest payments on the bonds, regardless of its income. The inclusion of warrants provides an additional layer of attractiveness to the bond, encouraging investment by offering a potential equity stake in the company.