Rule 11 of 14 in this unit2.1.1

2.1.1 Equity Securities

SIE outline 2.1.1

One Statute, Both Instruments

DGCL §157(a) lets a corporation "create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options entitling the holders thereof to acquire from the corporation any shares of its capital stock." One category, covering both: the statute never uses the word "warrant". NOT "there is a legal definition separating rights from warrants." There is not. The distinction is entirely in the instrument's own terms, which is exactly why a stem gives you the term and the strike rather than a rule number.

The trick

Common trap: Rights and warrants are the same instrument on different timescales: a right is just a short-dated warrant. Correct: They differ on TWO axes at once. A right is short-dated with an exercise price typically BELOW the market. A warrant is long-dated with an exercise price typically ABOVE the market at issue. Either axis alone classifies it. Struck below the market, or measured in weeks → right. Struck above the market, or measured in years, or attached to a bond → warrant.

The method for this kind of question
  1. 1h45m ÷ 80 items = 78.75 seconds per item. A classification item here should cost about 40.
  2. Stop hunting for a rule. Every fact in this lesson is a term in a document, so the stem must hand it to you.
  3. Arrears: count the missed years, then ADD the year now due. Dropping that last step is the classic error.
  4. Rights vs warrants: either axis classifies it. Weeks and below-market → right. Years and above-market → warrant.
  5. "Attached to the bonds" is a warrant, every time.
  6. An ADR trading in dollars does NOT remove currency risk: the dollar price is the foreign price after the exchange rate.
  7. Next: SIE Practice Quiz #5: Equity Securities, every answer explained.

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

A company issues certificates letting the holder buy stock at $18 while the market price is $20, expiring in 30 days. What are these certificates?

How sure are you?

Correct: A. Rights are struck below the current market price and are short-lived, living for weeks, exactly the pattern here.
B. Warrants are struck above the current market price and run for years, the opposite of both signals in this stem.
C. Convertible preferred would convert an existing security rather than let the holder buy new shares at a set price.
D. A depositary receipt represents foreign shares and carries no exercise price at all.

Unit: SIE outline 2.1.1

Next ruleWhat an ADR Actually Is

The whole unit · Your plan