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Investment Classifications of Securities

For the following investments identify whether they are:
1. Trading Securities
2. Available-for-Sale Securities
3. Held-to-Maturity Securities

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. 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. 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.

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Solution Preview

Held to maturity securities: are debt securities which the enterprise has the intent and ability to hold until maturity.

Trading securities: are debt and equity securities held principally for selling them in the near term.

Available-for-sale securities: include all other debt and equity securities.

a. A bond that will mature in 4 years was bought 1 month ago when the ...