What is a bond warrant?
It is a derivative instrument giving the holder the right, but not the obligation, to buy or sell a specific bond at a specific price either on a particular day or within a specified time period.
Key takeaways
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Bond warrants are derivative instruments that give holders the right but not the obligation to buy or sell specific bonds at predetermined prices.
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These instruments are similar to options and derive their value from the underlying bond security they represent.
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Investors can use bond warrants to hedge positions by locking in prices to protect against unfavorable bond price movements.
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Bond warrants allow investors to build positions in bonds without requiring large upfront capital outlays compared to buying bonds directly.
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Financial advisers and specialist investment publications often feature bond warrants as part of comprehensive investment strategies.
Where have you heard about bond warrants?
Your financial adviser may have suggested using them and specialist investment publications may feature them as part of an overall investment strategy. Investment guides are likely to have a section on bond warrants.
What you need to know about bond warrants.
They are derivatives, in that they 'derive' their value from the actual security. Bond warrants are similar to options in that the holder has the right to buy or sell the bond concerned but is not obliged to exercise that right. One reason to buy a bond warrant would be to hedge an investor's position by ensuring that, for example, they are able to buy the bond question should its price rise above that specified in the warrant. Another would be to build up a position in the bond in question without having to lay out a large amount of money upfront.