What is a Wedding Warrant?
How Does a Wedding Warrant Work?
A bond with a wedding warrant, also known as a harmless warrant, requires the holder to return the bond to the issuer if the holder purchases another 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 wedding warrant clause, Bob is not allowed to purchase another bond from with the same features from the company unless he is prepared to give up his existing bond to obtain the second.
Why Does a Wedding Warrant Matter?
Issuers introduce a wedding warrant clause to preserve a precise level of debt. It effectively guarantees that when additional debt is issued, a corresponding amount of debt is redeemed. It is particularly important for investors to recognize and investigate a wedding warrant when deciding to purchase bonds.