Ontario Barrister and Solicitor Practice Exam

What is a participating security?

1. A security that guarantees fixed dividends.

2. A bond issued by the corporation.

3. A security that is not limited, e.g., common shares.

4. A preferred share with limited voting rights.

The correct answer is: A security that is not limited, e.g., common shares.

A participating security is a type of investment that gives the holder the right to receive a portion of the issuing company's profits in addition to their initial investment. Option A, a security that guarantees fixed dividends, is incorrect because participating securities do not guarantee fixed payments and the dividends are based on the company's performance. Option B, a bond issued by the corporation, is incorrect because bonds have a fixed interest rate and do not offer a share of profits. Option D, a preferred share with limited voting rights, is incorrect because preferred shares do not typically participate in the company's profits, and have priority over common shares when it comes to voting. Option C is the correct answer because a participating security, unlike preferred shares, has no limit on the amount of profit the holder can receive and aligns the interests of the investor with those of the company.