Which statement about a rights offering is true?

• A. The rights allow stockholders to purchase newly issued common stock below the current market price, and the rights trade separately in the secondary market during the subscription period.
• B. All investors may purchase new shares at the current market price on the subscription date.
• C. The rights convert into bonds automatically.
• D. The offering does not involve trading rights.

Answer: (A)

The core idea is that a rights offering gives existing shareholders the option to buy additional shares at a price set in the offering, usually below the current market price, and those rights themselves can be traded in the secondary market during the subscription period. This structure lets shareholders preserve or adjust their ownership stake and provides the company with new capital. The statement is true because it captures both the discounted subscription price and the tradable nature of the rights during the period.

In contrast, not all investors can buy at market price on the subscription date—only rights holders have the right to participate, and they do so at the subscription price, not at the current market price. The rights don’t convert into bonds; they are separate instruments representing the option to buy more stock. And the offering necessarily involves trading rights, since those rights are typically transferrable and can be bought or sold in the market during the subscription period.