I. Introduction II. Two types of dilutive securities are convertible bonds and convertible preferred stock. A. Convertible bonds can be converted to other corporate securities during some specific time after issuance. B. Convertible preferred stock, includes an option for the holder to convert preferred shares into a certain number of common shares. Unlike convertible bonds, convertible preferred stock is considered equity (unless there is a mandatory redemption feature).
Note the example and journal entry on page 799.

III. Another type of dilutive security is a stock warrant. A. A stock warrant is a certificate that entitles the holder to acquire shares of stock at a certain price within a stated period. B. Stock warrants may be attached to bonds as incentives to buyers; attachment of warrants enables the issuer to pay a lower interest rate (because the buyer expects to receive value in the future by exercising the warrant, so he/she is willing to accept less interest income). C. Stock warrants may be either detachable or nondetachable from the bond or other financial instrument. D. If the warrant is detachable, at issuance, the value of the warrant is recorded as a credit to “Paid-in Capital—Stock Warrants.” E. If the warrant is not detachable, no separate account is credited at issuance. The credit is to “Bonds Payable” only. F. The relative value of the warrants and the bonds may be established either through the proportional method or the incremental method.

Note the issuance of bonds with detachable warrants and calculation of the values using the proportional method in Illustration 16-1 on page 801.

IV. Preemptive privilege stock rights give existing stockholders the right to purchase newly issued shares in proportion to their holdings.

V. Often granted to employees as a form of compensation, stock