SIE Understanding Products and Their Risks Question 40: Answer and Explanation

Question: 40

Which of the following is a typical scenario for a company providing an incentive for current bondholders or stockholders to purchase additional preferred stocks or bonds?

• A. Offered in combination with the bond or preferred stock, a stock call warrant provides an opportunity, but not an obligation, for the purchaser to exercise the warrant, but not resell the warrant to anyone else.
• B. Offered in combination with the bond or preferred stock, a stock call warrant provides an opportunity, but not an obligation, for the purchaser to exercise the warrant at a price lower than the current market price.
• C. Offered in combination with the bond or preferred stock, a stock call warrant provides an opportunity, but not an obligation, for the purchaser to exercise the warrant within a specific period, beginning at some point, as much as six months or a year after the issue.
• D. Offered in combination with the bond or preferred stock, a stock call warrant provides an obligation for the purchaser to exercise the warrant within a specific period, beginning at issuance and lasting as much as six months or a year.

Correct Answer: C

Explanation:

C: Choice C is correct because a stock call warrant provides an opportunity, not an obligation, to purchase a stock at a price generally higher than the market price at issue, but hopefully below the market price during the exercise period. Choice A is incorrect because a stock call warrant can generally be resold on the open market. Choice B is incorrect because the exercise price is typically higher than the market price at issue. Choice D is incorrect because a stock call warrant typically provides an opportunity, but not an obligation, to purchase stock during a period beginning sometime in the future.