Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What is a rights issue in the context of capital markets?

A new type of bond issuance
Issuing additional shares to existing shareholders
Publication of financial reports
Sales promotion strategies

The correct answer is: Issuing additional shares to existing shareholders

A rights issue refers to the process by which a company offers additional shares to its existing shareholders, providing them the first opportunity to buy these new shares usually at a discounted price compared to the current market value. This mechanism is designed to raise additional capital for the company while giving existing shareholders the ability to maintain their proportional ownership in the company. When a rights issue occurs, shareholders receive rights or options to purchase the new shares in proportion to their current holdings. This practice is often utilized by companies needing to bolster their financial position, expand their operations, reduce debt, or undertake other corporate strategies. The other options do not align with the definition of a rights issue. A new type of bond issuance pertains to debt financing, not equity. The publication of financial reports relates to transparency and corporate governance, while sales promotion strategies connect to marketing practices, neither of which involve the offering of shares to existing shareholders.