Corporations have always been on the lookout for new types of securities. Warrants and convertible securities are among the earliest of corporate financial innovations. The most common warrant is a long-term call option that is attached to a bond or a stock issue. It usually gives its holder an option to buy for cash another security of the company, usually its common stock. The typical convertible security is a long-term option that is attached to a bond or a preferred stock and it gives its holder the option to exchange the bond or preferred stock for another security of the company, usually common stock.

Warrants are typically of shorter duration than convertible bonds. They are also detachable from the securities from which they are issued and require cash payment of the exercise price when exercised. The Black-Scholes option valuation formula may be used to place a value on warrants, but care must be taken to allow for the effects of dividends and changes in the number of shares outstanding. Warrants are frequently issued with private placement bonds and occasionally with public bond issues. They are also occasionally used as compensation for investment bankers and as part of restructuring packages for firms reorganizing after bankruptcy.

The value of a convertible bond is equal to the value of the bond component plus the value of the option component. While the holders of convertible bonds and the warrants are not entitled to receive any cash dividends paid before exercise of the option, the exercise prices are automatically adjusted for any stock split or stock dividends. Corporations usually have call options on the convertible bonds they issue. This allows them to call the bonds in order to force conversion of the bonds. The optimal rule for calling convertible securities would be to call them when, and only when, the value of the convertible security reaches the call price.