What do warrants provide to the holder?

Warrants provide the holder with the right to buy a share of common stock at a fixed price, known as the exercise price or strike price. This means that the investor has the option, but not the obligation, to purchase the underlying stock at that predetermined price before the warrant expires. This characteristic can be attractive to investors, as it allows them to invest in equity at a potentially favorable price, especially if the market price of the stock rises above the strike price.

Warrants are often issued in conjunction with other securities, such as bonds or preferred stocks, as an added incentive for investors. If the stock performs well, holders can benefit from price appreciation when they exercise their warrants. Hence, the option to purchase shares at a set price offers investment leverage.

In contrast, the other options do not accurately describe the function of warrants. The first option relates to the right to sell stock, which is characteristic of put options rather than warrants. The third option concerning guaranteed dividends does not apply to warrants, as they do not confer ownership rights that would earn dividends. Finally, converting bonds into common stock describes a different financial instrument known as convertible bonds, not warrants.