What Is an Installment Warrant?
- You purchase installment warrants in two installments. Financial institutions that offer installment warrants typically have different terms and conditions associated with the purchase of the installment warrant.
- In the first installment payment, you will pay the purchase price of the installment that includes a capital contribution. This price varies from financial institution to financial institution. According to "Principles of Finance" by Scott Besley and Eugene Brigham, the cost of an installment warrant averages 30 percent to 60 percent of the share price. In addition to the capital component, the first installment includes a borrowing fee and the prepaid interest. Further, the price of the first installment depends on the share price, the time to maturity and the current interest rate.
- With an installment warrant, the price of the final installment is established at the time you purchase the installment warrant. Additionally, you do not have to pay the final installment and take delivery of your shares before the maturity of your installment warrant. The financial institution structures the final installment payment as a loan. Just as with any other type of loan, the interest rates and fees associated with an installment warrant can have tax benefits.
- When your installment warrant matures, you have several options. First, you can pay for the final installment, including any fees associated with the shares. Additionally, if you have other installment warrants at the same financial institution, you can defer the final payment and roll it into another installment warrant. You can also choose to sell your installment warrant to your financial institution or another investor. Finally, you can choose to do nothing and let the installment warrant mature. In this case, your financial institution will sell the installment warrant for you and give you any proceeds after deducting the applicable fees and interest due.
