During a rights offering, rights themselves trade in the secondary market during the subscription period. True or false?

• A. True
• B. False
• C. Not specified
• D. Cannot be determined

Answer: (A)

Rights in a rights offering are transferable instruments that trade in the market during the subscription period. This means you can buy or sell the rights in the secondary market while the offer is open, and their price reflects the discount to the current stock price, the subscription price, and the time remaining until expiration. Investors who don’t plan to exercise can sell their rights, while those who want to maintain or increase their stake can exercise by paying the subscription price for the new shares.

For a quick sense of value, one right’s approximate value is (current stock price minus the subscription price) divided by the number of rights required to buy one new share, ignoring other factors like dilution and fees. If the stock is at 100 and the subscription price is 80, and you need 4 rights per new share, the rights’ value is roughly (100 - 80) / 4 = 5 per right, plus any remaining time value.

As expiration approaches, the value of the rights tends to decay toward their intrinsic value or zero if the rights become worthless.