Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which of the following is an advantage of bootstrapping when valuing investments in securities?

It requires no knowledge of current market prices.

It allows for the construction of a zero-coupon yield curve from coupon-bearing bonds.

It eliminates all market risk associated with securities.

It guarantees higher returns compared to other valuation methods.

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Verified step by step guidance

Understand the concept of bootstrapping: Bootstrapping is a method used in financial accounting and investment valuation to construct a zero-coupon yield curve from the prices of coupon-bearing bonds. This yield curve is essential for valuing securities and understanding interest rate dynamics.

Analyze the advantages of bootstrapping: Bootstrapping allows for the construction of a zero-coupon yield curve, which is a critical tool for pricing bonds and other fixed-income securities. It provides a way to derive the yield of zero-coupon bonds from coupon-bearing bonds.

Evaluate the incorrect options: Bootstrapping does not eliminate market risk, nor does it guarantee higher returns compared to other valuation methods. Additionally, it requires knowledge of current market prices to derive the yield curve, so the option stating it requires no knowledge of market prices is incorrect.

Focus on the correct advantage: The correct advantage of bootstrapping is its ability to construct a zero-coupon yield curve from coupon-bearing bonds. This is a valuable tool for financial analysts and investors in understanding the term structure of interest rates.

Conclude the reasoning: By understanding the mechanics and purpose of bootstrapping, it becomes clear that its primary advantage lies in its ability to derive a zero-coupon yield curve, which is essential for accurate valuation of investments in securities.