Question 73

When first issued, the stated exercise price is greater than the market price of the underlying stock.

Warrants are typically issued with an exercise price that is set above the current market price of the underlying stock at the time of issuance. This structure incentivizes investors to purchase the stock at a future date, anticipating that the market price will exceed the exercise price.

A) Most of them have voting rights.

This statement is incorrect because warrants do not convey voting rights to their holders. Unlike shares of stock, which provide voting privileges, warrants are merely options to purchase shares at a specified price and do not confer any ownership or associated rights until exercised.

B) Like rights, they are usually short-term instruments.

This is misleading; while rights are typically short-term instruments, warrants often have longer maturities, sometimes lasting several years. Therefore, this statement does not accurately represent the nature of warrants compared to rights.

C) When issued in connection with a debenture, they diminish the attractiveness of the issue.

This statement is incorrect. In fact, when warrants are issued with debentures, they often enhance the attractiveness of the issue by providing additional potential value to investors. The presence of warrants can make the overall offering more appealing.

D) When first issued, the stated exercise price is greater than the market price of the underlying stock.

This statement is true. The design of warrants generally involves setting the exercise price above the current market price to encourage future investment, as investors hope that the stock price will rise above the exercise price before the warrant expires.

Conclusion

The correct answer, stating that the exercise price is greater than the market price when first issued, accurately reflects the fundamental nature of warrants. Options A, B, and C are incorrect as they either misrepresent the rights associated with warrants or misunderstand their purpose and structure. Thus, option D stands out as the only accurate statement regarding warrants.