Certified Management Accountant Practice Exam

Warrants are financial instruments that give the holder the right to purchase a company's stock at a predetermined price, typically for a certain period. They are often issued in conjunction with preferred stock or bonds as an incentive for investors, making the investment more attractive.

The correct understanding of the function of warrants relates closely to their role in financing and capital structure. When a company issues warrants, it can lead to a dilution of existing shares when those warrants are exercised, which can be a strategy to enhance overall company capital without immediately impacting the cost of debt. By including warrants, a company can also provide potential upside for investors, which may reduce the perceived need for a higher cost of debt in the form of interest rates.

Ultimately, warrants serve as a tool to lower the cost of issuing debt, as they can make fixed-income securities more appealing to potential investors. This can lead to a lower coupon rate on bonds issued, as the added value of the warrants can offset some of the risk associated with the debt. In this context, the function of warrants aligns with the strategic management of financial resources within a company.