A detachable warrant is a derivative that is attached to a debt security, giving the owner the right to buy a certain number of shares of the issuer at a fixed exercise price. The debt issuer includes the detachable warrants in its sale of the debt security in order to obtain a lower interest rate than would be possible without the warrants, while a buyer is interested in the profit it could earn by converting the warrants to stock if the entity’s stock price rises.
A warrant contains the following information:
- The time period during which the holder can exercise the right to buy the issuer's shares
- The exercise price at which the shares can be purchased
- The number of shares that can be purchased
Since this type of warrant is detachable from the debt security with which it is paired, the two elements of a debt offering exist independently and should be treated as separate securities. A holder of a detachable warrant may eventually exercise it and purchase the entity’s stock, or allow it to expire.