SIE Exam Question 267: Answer and Explanation

Question: 267

Pre-emptive Rights and Stock Warrants have a number of similarities. Which of the below represent characteristics these products have in common?

I. Each has a fixed price at which the holder may purchase shares of the issuer's common stock.

II. The fixed exercise price for both products is initially set at a level below the current market value of the common stock.

III. These products are tradable on securities exchanges

IV. Both have relatively short-term expiration dates

• A. I, II, and III
• B. I and IV
• C. II and IV
• D. I and III

Correct Answer: D

Explanation:

D: Pre-emptive Rights entitle a corporate shareholder to purchase shares in an additional share offering at a favorable below market price. Warrants enable the holder of the warrant to buy more shares at an exercise price which when first set, tends to be higher than CMV at that time. Warrants are normally quite long term whereas rights typically expire in 30 days or less. Both are tradable on organized stock exchanges, such as the NYSE.