Multiple Choice
In the 1920s, the danger of buying stock on credit (buying on margin) was that if the stock price dropped, borrowers:
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7. Receivables and Investments
Introduction to Investments in Securities
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Jean wants to invest a gift she received in marketable securities. Which of the following would be classified as a debt security for accounting purposes?
A
Common stock
B
Stock options
C
Corporate bonds
D
Preferred stock
Verified step by step guidance1
Understand the classification of securities: Securities are broadly categorized into equity securities and debt securities. Equity securities represent ownership in a company, while debt securities represent a creditor relationship with the issuer.
Review the characteristics of debt securities: Debt securities typically include instruments like bonds, notes, and debentures. These securities involve borrowing and repayment terms, such as interest payments and maturity dates.
Analyze the options provided: Common stock and preferred stock are equity securities because they represent ownership in a company. Stock options are also equity-related instruments, as they provide the right to purchase shares at a predetermined price.
Identify corporate bonds as debt securities: Corporate bonds are issued by companies to raise funds and represent a debt obligation. Investors in corporate bonds receive interest payments and the principal amount at maturity.
Conclude that corporate bonds are classified as debt securities for accounting purposes, as they meet the criteria of representing a creditor relationship with the issuer.
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