Question

In a continuation of their efforts to explore the financial condition of ABC Company, the Board...

In a continuation of their efforts to explore the financial condition of ABC Company, the Board of Directors has now started to explore the various investment strategies of the company. They would like to understand more about the differences between debt versus equity investments. They also wish to learn more about the various types of investments reported on the Balance Sheet. Using your text and outside sources, explain the following: (1) debt versus equity securities; (2) various types of investments such as those listed in Exhibit 15-2; and (3) how to account for these investments (refer to Exhibit 15-8 as a guide). Keep in mind the intended audience of the memo.

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Answer #1

Debt securities: It refers to a debt instrument, such as government bond,corporate bond, certificate of Deposit, municipal bond or preferred stock, that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount borrowed), interest rate, and maturity and renewal date. It also includes collaterized securities, such as collaterized debt obligations, collaterized mortgage obligations, Mortgage backed securities issued by the Government national mortagage association and Zero- coupoun securities.

Equity Securities: Equity securities represent a claim on the earnings and assets of a corporation , while debt securities are investments into debt instruments.

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