Multiple Choice
In the context of investments in securities, if you are looking to use 'good debt' to build equity, which of the following strategies best describes this approach?
109
views
7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
Which of the following is a primary benefit of investing in marketable securities for a company?
A
They eliminate all investment risk for the company.
B
They guarantee a fixed rate of return regardless of market conditions.
C
They are not subject to any accounting or reporting requirements.
D
They provide liquidity while earning a return.
Verified step by step guidance1
Understand the concept of marketable securities: Marketable securities are short-term investments that can be quickly converted into cash, typically within a year. They are highly liquid and often include assets like Treasury bills, commercial paper, and money market funds.
Evaluate the incorrect options: The first option, 'They eliminate all investment risk for the company,' is incorrect because all investments carry some level of risk, even marketable securities. The second option, 'They guarantee a fixed rate of return regardless of market conditions,' is also incorrect because returns on marketable securities can vary based on market conditions. The third option, 'They are not subject to any accounting or reporting requirements,' is incorrect because marketable securities must be accounted for and reported in financial statements.
Focus on the correct benefit: The primary benefit of investing in marketable securities is their liquidity. Liquidity refers to the ease with which an asset can be converted into cash without significantly affecting its value.
Understand the additional advantage: While providing liquidity, marketable securities also earn a return, which is typically lower than long-term investments but still beneficial for companies looking to manage short-term cash needs effectively.
Conclude the reasoning: The correct answer is 'They provide liquidity while earning a return,' as this aligns with the purpose and characteristics of marketable securities in financial accounting.
Related Videos
Related Practice
