Explanation

Firms having difficulty in raising funds through bonds and are not willing or able to pay high interest rates which might compromise the profitability of the firm itself (or worse, lead the firm to bankruptcy) can consider issuing bonds with warrants. This opportunity for higher return might convince lenders/investors that the risks associated with the firm are compensated by this upside potential.

Sample Response

Small, risky firms venturing into projects that require additional financing will have difficulty in raising funds through bonds at a fair interest rate, as investors will require high interest. By issuing bonds with warrants, small firms give their bondholders the additional right to participate in the growth of the company.