Multiple Choice
Which term best describes the present value of future cash flows expected from investment projects?
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7. Receivables and Investments
Introduction to Investments in Securities
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Which of the following statements about investing in securities is false?
A
Debt securities such as bonds typically pay interest to investors.
B
Investments in equity securities can provide both dividend income and potential capital gains.
C
Investors may classify securities as trading, available-for-sale, or held-to-maturity.
D
All investments in securities are guaranteed to generate positive returns.
Verified step by step guidance1
Step 1: Understand the types of securities mentioned in the problem. Debt securities, such as bonds, typically pay interest to investors. Equity securities, such as stocks, can provide dividend income and potential capital gains. These are common characteristics of these types of investments.
Step 2: Review the classification of securities. Investors may classify securities into three categories: trading (short-term investments for profit), available-for-sale (investments held for an indefinite period), and held-to-maturity (debt securities intended to be held until maturity). These classifications are based on the investor's intent and accounting standards.
Step 3: Analyze the statement 'All investments in securities are guaranteed to generate positive returns.' This statement is false because investments in securities carry risks, including market risk, credit risk, and interest rate risk. Returns are not guaranteed and can be negative depending on market conditions and other factors.
Step 4: Compare the false statement with the other statements provided. The other statements accurately describe characteristics of debt securities, equity securities, and the classification of securities, making them true.
Step 5: Conclude that the false statement is 'All investments in securities are guaranteed to generate positive returns,' as it contradicts the fundamental principle of investment risk.
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