Question

Classify the following investments. Each case is independent of the other.

Investment Classifications

(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)10-year bonds were purchased this year. The bonds mature at the first 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)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.

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

Answer 1

Investments can be classified based on the intent and duration of the investment. Bonds intended to be sold shortly are trading securities, a significant stock purchase for long-term control is a strategic investment, and seeking regular dividends from preferred stock is a permanent investment.

Step-by-step explanation:

Classifying the following investments based on the descriptions given:

• (a) Trading security: This bond is intended to be sold in the short term for a profit, classifying it as a trading security.
• (b) Strategic investment: The purchase of a significant portion of Farm-Co's outstanding stock with plans to increase the holding to 30% qualifies as a strategic investment.
• (c) Held-to-maturity: As these bonds were purchased to be held until their maturity next year, they are classified as held-to-maturity securities.
• (d) Liquidity investment: While the intent is to hold the bonds until maturity, the company might sell them due to liquidity needs. This makes it a liquidity investment or available-for-sale security, depending on the company's accounting policy.
• (e) Long-term investment: Money set aside for an expansion project in 10 years with a bond maturing in the same timeframe indicates a long-term investment.
• (f) Permanent investment: Preferred stock bought for its constant dividends with the intent to hold for a long time is considered a permanent or long-term investment.

Considering the different risk levels and returns of investments, it's noted that over a sustained period, stocks have an average return higher than bonds, and bonds have an average return higher than a savings account. High-risk investments do not inherently come with low returns; in fact, they often offer the possibility of higher returns to compensate for the increased risk.

Answer 2

Check the following clasifications

Step-by-step explanation:

Question a). Answer :- Trading securities.

Question b). Answer :- None of the above.

Question c). Answer :- Trading securities.

Question d). Answer :- Available for sale securities.

Question e). Answer :- None of the above.

Question f). Answer :- Held to maturity securities.