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One site suggested the difference is that the warrant in the bond with warrant is a fixed price on company stock. E.g. for a \$1000 bond, you can buy 500 shares at \$2 each. And that convertible bonds does not have a fixed price term.

Another site suggested that with a bond with warrant, the warrant can be sold separately from the bond, while a convertible bond has not that possibility.

Are any of these suggestions correct, or is it something else that make up the (major) difference?

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2 Answers

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The major difference is that the equity option embedded in a convertible bond is not detachable from the convert, so that you have to value the bond and the embedded option together. If you want to make a direct comparison with a detachable warrant, you can think of the the embedded option in a convertible bond as having a strike price equal to the value of the remaining cash flows of the convertible bond, so that the strike prices changes over time as coupon payments are made, and changes with the level of both interest rates and the credit quality of the bond issuer.

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Both statements are correct.

A warrant allows a holder to BUY a stock at a set price. Because there is a specific price, all that is needed is CASH to get the stock. As such, the warrant can be separated from the bond, and someone else could use it. As a result, it is valued separately from an accounting perspective.

A convertible bond, on the other hand, simply allows the holder to TRADE the bond for some stock. Since the holder needs the BOND to get the stock (vs. cash), the value of the trade cannot be separated from the stock.

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So a bond with warrant is really simply a bond plus a call on a stock right? –  SRKX Aug 26 '13 at 17:48
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