What is a Harmless Warrant?
A harmless warrant is a bond provision that instructs a holder to relinquish the bond to the issuer should the holder purchase another bond from the same company with comparable features.
How Does a Harmless Warrant Work?
A bond with a harmless warrant, also known as a wedding warrant, requires the holder to return the bond to the issuer if the holder purchases a different bond from the same company that quantitatively resembles the original bond.
For example, suppose Company ABC issues Bob a bond with a $1,000 par value, a coupon rate of 5%, and a maturity date of December 31, 2011. Pursuant to the bond's harmless warrant clause, Bob may not purchase an additional bond from the company that has these same features unless he is prepared to surrender his existing bond upon the purchase of the second.
Why Does a Harmless Warrant Matter?
Issuers insert a harmless warrant clause to maintain a specific level of debt. It effectively ensures that when additional debt is issued, a corresponding amount of debt is redeemed. It is especially important that investors recognize and account for a harmless warrant when evaluating which bonds to purchase.
