Question

(Investment Classifications)For the following investments, identify whether they are:

1. Trading debt securities.

2. Available-for-sale debt securities.

3. Held-to-maturity debt securities.

4. None of the above.

Each case is independent of the other.

(a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases,

which is expected next month, it will be sold.

(b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30%

of its outstanding stock.

(c) Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year.

(d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money

has been tight recently and they may need to be sold.

(e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.

(f) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project

planned 10 years from now.

Short answer

1. Trading Debt Securities
2. None of these
3. Available-for-Sale Debt Securities
4. Available-for-Sale Debt Securities
5. Held-to-maturity Debt Securities
6. Held-to-maturity Debt Securities

Step-by-step solution

Step-by-Step Solution:Step 1: Definition of Investment

When a person invests their money to earn a return on it, this is known as the investment.

Classification of the part a

a) In this, the type of investment is trading debt securities because this is purchased when the price is dropped and sold when the price increases.

Step 3:Classification of part b

b) In this option, none of these is chosen because there is no detail about the sale of the investment.

Step 4:Classification of part c

c) This type of investment is an available-for-sale investment because the investment will be available for sale in the next month.

Step 5:Classification of part d

d) This type of investment is a held-to-maturity investment because the investment will hold for the long term.

Step 6:Classification of part e

e) This type of investment is a held-to-maturity investment because the investment will hold till the maturity of the investment.

Step 7:Classification of part f

f) This type of investment is a held-to-maturity investment because the investment will hold for a longer period or till maturity.