Question

For the following investments, identify whether they are: Trading debt securities. Available-for-sale debt securities. Held-to-maturity debt securities. 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.

Answer 1

Answer:

(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.  - Trading Debt Securities

Trading debt securities such as these are held only for a short time before they are sold with the goal being short term profit.

(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.  - None of the Above

This is an Equity Investment.

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

Like the bond in (a), this is being held for a short while only and then it will be sold so it is a Trading debt security.

(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.  - Available-for-sale debt securities

Available for sale debt securities are to be sold before maturity and therefore have no certain selling time. The bond above has no selling time as it might be sold at any point so it is an Available-for-sale debt security.

(e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.  - None of the above.

This is an Equity investment as well.

(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. - Held-to-maturity debt securities.

Held to Maturity bonds are bought with no intention of selling and the company hopes to hold them till they mature like this bond which will be held for 10 years.