Multiple Choice
Which of the following statements about Return on Investment (ROI) is true?
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7. Receivables and Investments
Introduction to Investments in Securities
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Which of the following types of securities typically trade with accrued interest?
A
Preferred stocks
B
Mutual fund shares
C
Common stocks
D
Corporate bonds
Verified step by step guidance1
Understand the concept of accrued interest: Accrued interest refers to the interest that has accumulated on a bond since the last interest payment date but has not yet been paid to the bondholder.
Recognize the types of securities that generate interest: Corporate bonds are debt instruments that pay periodic interest (coupon payments) to bondholders, making them subject to accrued interest when traded.
Differentiate between securities: Preferred stocks, mutual fund shares, and common stocks do not typically generate periodic interest payments. Instead, they may provide dividends or capital gains, which are not considered accrued interest.
Identify the trading mechanism: When corporate bonds are traded, the buyer compensates the seller for the accrued interest up to the trade date, as the seller is entitled to the interest earned during their holding period.
Conclude that corporate bonds are the correct answer: Corporate bonds are the type of security that typically trades with accrued interest due to their periodic interest payments.
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