SIE Exam Question 306: Answer and Explanation

Question: 306

When comparing rights and warrants, which of the following statements is TRUE?

• A. Rights are often added to bond issues as sweeteners; warrants are offered to existing shareholders to permit them to maintain their proportionate interest in the company when additional shares are issued
• B. Warrants have shorter expiration periods than rights
• C. Warrants protect shareholders against dilution, rights do not
• D. The exercise price of a right is generally below the price of the stock when the right is issued; the exercise price of the warrant is generally above the price of the stock when it is issued.

Correct Answer: D

Explanation:

D - Rights are short-term instruments that allow a shareholder to purchase the stock below its market price for a period that usually expires after 4-6 weeks. They are issued to existing shareholders in proportion to their ownership interest, so that if exercised, they allow the shareholder to maintain their percentage of ownership, or protect against dilution. Warrants are long term instruments and are often used as sweeteners in corporate bond issues. They do not protect shareholders from dilution.