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It's important to note that the options discussed up until now are strictly bought and sold in the secondary market. That is, they're traded between investors, and the companies don't get involved. Specifically, companies don't get any money when the options are written or exercised.

Warrants are similar to call options but are issued by the underlying companies themselves. When a warrant is exercised, the company issues new stock in return for the specified price. Warrants are therefore primary market instruments. Warrants are like call options in that they give their owners the right to buy stock at a designated price over a specified time period. They differ from stock options in that the time period is much longer, typically several years.

Warrants are usually issued in conjunction with other financing instruments as "sweeteners" to make the primary security more attractive. For example, suppose a company wants to borrow, but isn't in good financial condition, so lenders have rejected its bonds. They may be induced to buy the company's bonds if the firm attaches one or more warrants to each bond giving the holder the right to buy a share at $50 within the next five years. The warrants provide incentives to buy the bonds if people think the stock is likely to go over $50 before five years have passed. If bond holders do exercise the warrants then the company will receive additional cash as they issue new shares that are sold to fulfill the warrants.

Warrants can generally be detached and sold independently at a market value of their own. This effectively reduces the price of the bonds and increases their yield to the investor. Alternatively, bondholders can keep the warrants and exercise them for a quick gain if the stock's price rises above $50. Notice that if the warrants are exercised, the company receives an equity infusion based on a price of $50 rather than the higher market price. The bonds are unaffected by the exercise of the warrants.
Employee Stock Options

For many years, American companies have given certain employees stock options as part of their compensation. Companies like paying with options because they don't cost anything when issued. Since employees who receive options get lower salaries, the practice improves the company's financial statements by lowering payroll costs. Beyond that, supporters maintain that the employees will be more motivated to act in the best interest of the company, since the value of their options are directly tied to market price.