___________ are usually issued together with a bond or preferred stock, which entitles the holder to buy a specific amount of common stock at a specific price.

Question

Options

• AMerits
• BCertifications
• CMutual funds
• DWarrants

• A
  4% (2)
• B
  8% (4)
• C
  15% (7)
• D
  73% (35)

Explanation

Warrants are financial instruments attached to bonds or preferred stock that give the holder the right - but not the obligation - to purchase a specified number of common shares at a predetermined price (the exercise price), typically within a set time period. They are used by companies as a sweetener to make bond or preferred stock offerings more attractive to investors.

Why the distractors are wrong:

• Merits (A) is not a financial instrument at all - it has no meaning in this securities context.
• Certifications (B) are credentials or attestations, not investment instruments.
• Mutual funds (C) are pooled investment vehicles holding diversified assets - they are standalone products, not issued alongside bonds or preferred stock as an attachment.

Memory tip: Think of a warrant as a "warrant" (authorization) to buy stock later - just like a search warrant gives police the right to search, a stock warrant gives the holder the right to buy shares at a locked-in price.

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