Multiple Choice
Raising needed funds through borrowing to increase a firm's rate of return is called:
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7. Receivables and Investments
Introduction to Investments in Securities
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Sarah recently received a \$500{,}000 lump sum and wants to invest in securities. Which of the following would be considered an equity security?
A
Common stock of a corporation
B
Corporate bond
C
Treasury bill
D
Certificate of deposit (CD)
Verified step by step guidance1
Understand the concept of equity security: Equity securities represent ownership in a company, typically in the form of common stock or preferred stock. Holders of equity securities have a claim on the company's assets and earnings.
Review the options provided: Common stock of a corporation, Corporate bond, Treasury bill, and Certificate of deposit (CD).
Identify the characteristics of each option: Common stock represents ownership in a corporation, making it an equity security. Corporate bonds, Treasury bills, and CDs are debt instruments, meaning they represent loans made by investors to entities and are not equity securities.
Focus on the correct answer: Since equity securities represent ownership, the correct answer is 'Common stock of a corporation.'
Conclude the reasoning: Common stock is the only option that fits the definition of an equity security, as it provides ownership rights in a corporation, unlike the other options which are debt instruments.
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