Question

E17.1 (LO 1, 2) (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 has committed the money for an expansion project planned 10 years from now.

Answer 1

1. Trading securities is a category of securities that includes both debt securities and equity securities, and which an entity intends to sell in the short term for a profit that it expects to generate from increases in the price of the securities.

2. An available-for-sale security (AFS) is a debt or equity security purchased with the intent of selling before it reaches maturity or holding it for a long period should it not have a maturity date.

3.Held-to-maturity (HTM) securities are purchased to be owned until maturity. A company's management might invest in a bond that they plan to hold to maturity.

Answer a)Trading debt securities.

Answer b)None of the above

Answer c)Available-for-sale debt securities

Answer d)Held-to-maturity debt securities

Answer e)None of the above

Answer f)Held-to-maturity debt securities