Warrant price: Overview, definition, and example
What is warrant price?
Warrant price refers to the predetermined price at which the holder of a warrant can purchase the underlying security, such as stocks or bonds, when they exercise the warrant. A warrant is a financial instrument that grants the holder the right, but not the obligation, to buy the underlying asset at the warrant price before the warrant expires. The warrant price is set at the time the warrant is issued and is typically higher than the market price of the underlying asset at the time of issuance, reflecting the potential for the asset’s value to increase.
Why is warrant price important?
The warrant price is important because it determines the cost for the warrant holder to convert their warrants into the underlying asset. This price is a key factor in assessing whether exercising the warrant will be profitable. If the market price of the underlying asset rises above the warrant price, the holder can exercise the warrant to purchase the asset at a lower price, realizing a profit. Conversely, if the market price remains below the warrant price, the holder may choose not to exercise the warrant, as it would be cheaper to buy the asset directly from the market.
Understanding warrant price through an example
Imagine a company issues warrants that give the holder the right to purchase shares at a warrant price of $50 per share. If the stock price rises to $70 per share in the future, the warrant holder can exercise the warrant and buy shares for $50, then sell them at the market price of $70, realizing a $20 profit per share.
In another example, if the same company’s stock price drops to $40 per share, the holder may choose not to exercise the warrant because it would be cheaper to buy the shares directly from the market for $40 rather than exercising the warrant at $50.
An example of warrant price clause
Here’s how a warrant price clause might appear in a warrant agreement:
“The holder of this Warrant has the right to purchase [X] number of shares of the Company’s common stock at a price of $50 per share (the 'Warrant Price') at any time before the expiration date of the Warrant.”
Conclusion
The warrant price is a key feature of warrants, as it sets the price at which the holder can purchase the underlying asset. It plays a crucial role in determining the profitability of exercising a warrant, especially when the market price of the underlying asset fluctuates. Understanding the warrant price allows investors and holders to assess their potential gains and decide whether to exercise their warrants based on market conditions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.