Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What are warrants in financial terms?

1. Short-term debt obligations

2. Long-term equity securities giving the right to purchase stock

3. Programs for employee stock options

4. Insurance policies for business assets

The correct answer is: Long-term equity securities giving the right to purchase stock

Warrants are indeed long-term equity securities that grant the holder the right, but not the obligation, to purchase a company's stock at a specified price, known as the exercise or strike price, within a certain timeframe. They are typically issued along with bonds or preferred stock as a sweetener to make the offering more attractive to investors. By holding warrants, investors can benefit from potential increases in the stock's value without having to invest directly in the equity until they decide to exercise their right to purchase the shares. The nature of warrants allows them to be a useful tool for both companies, as a way to raise capital, and for investors, as a means to speculate on the future performance of a stock. When the underlying stock price exceeds the exercise price, holders may choose to exercise their warrants, leading to potential profits. This structure differentiates warrants from other financial instruments and highlights their unique role in the market.