Multiple Choice
In the context of investments in securities, what is the consideration given by an investor when purchasing a security?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
Which statement best describes how an investor makes money from investing in debt securities?
A
By exercising stock options to purchase shares at a discount
B
By earning dividends paid out of company profits
C
By selling shares at a price higher than the purchase price
D
By receiving periodic interest payments and the return of principal at maturity
Verified step by step guidance1
Understand the nature of debt securities: Debt securities are financial instruments issued by entities (such as corporations or governments) to raise funds. They typically involve borrowing money from investors with a promise to repay the principal amount at maturity along with periodic interest payments.
Recognize the primary way investors earn money from debt securities: Investors receive periodic interest payments, which are calculated based on the interest rate (coupon rate) specified in the debt security agreement.
Understand the return of principal: At the maturity date of the debt security, the issuer repays the original principal amount to the investor, completing the investment cycle.
Compare debt securities to other investment types: Unlike equity securities (stocks), which generate returns through dividends or capital gains, debt securities focus on fixed interest payments and principal repayment, providing a predictable income stream.
Conclude that the correct answer is: 'By receiving periodic interest payments and the return of principal at maturity,' as this describes the fundamental way investors earn money from debt securities.
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