Canadian Securities Course (CSC) Level 1 Practice Exam

What is a Warrant?

1. A form of savings bond

2. A company's promise to pay dividends

3. Security that grants the right to buy company shares at a set price

4. A type of derivative contract

The correct answer is: Security that grants the right to buy company shares at a set price

A warrant is indeed a security that grants the holder the right to buy company shares at a predetermined price, typically for a specified period of time. This means that warrants provide investors with an opportunity to purchase shares at potentially favorable prices if the stock price rises above the exercise price set in the warrant. Warrants are often issued by companies as a way to raise capital, and they can add value and flexibility to an investor's portfolio. The other options do not accurately define a warrant: a form of savings bond pertains to fixed-income instruments with guaranteed interest payments, a company's promise to pay dividends relates to the distribution of earnings to shareholders, and a type of derivative contract involves financial instruments whose value is derived from the performance of assets, indexes, or interest rates. Thus, the answer clearly aligns with the correct definition of a warrant.