Question

When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price of the (embedded) warrants. If it increases the exercise price, will the cost of debt go up or down?

Answer 1

If company increases the exercise price of the warrants, which are attached to the debt, then the cost of debt would increase because warrants have become less attractive, as when the exercise price is increased and since the warrants are like a call option, the increase in exercise price of a call option would make the call option less attractive so the cost of debt will go up for the company because the embedded option attached to the debt has come down so the cost of debt will go up to compensate that because it would be less likely that debtholders will exercise their options so they will remain as debtholders, and they will not get converted into equity holders because company has raised the equity warrants exercise price and so the company will have to deal with and increase cost of debt as debtholders will not get converted into equity holders