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11-1 Odd-numbered Solutions CHAPTER 11 MARKETABLE SECURITIES, DERIVATIVES, AND INVESTMENTS Questions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions 11.1 See the text or the glossary at the end of the book. 11.3 a. Debt securities that a firm intends to hold to maturity (for example, to lock in the yield at acquisition for the full period to maturity) and has the ability to hold to maturity (for example, the firm has adequate liquid assets and borrowing capacity such that it need not sell the debt securities prior to maturity to obtain cash) appear as “debt held to maturity.” All other debt securities appear in the “available for sale” category. The latter includes short-term investments in government debt securities that serve as a liquid investment of excess cash and short-and long-term investments in government and corporate debt securities that serve either as hedges of interest rate, exchange rate, or similar risks or as sources of cash at a later date to pay debt coming due. b. The classification as “trading securities” implies a firm’s active involvement in buying and selling securities for profit. The holding period of trading securities is typically measured in minutes or hours instead of days. The classification as “available for sale” implies less frequent trading and usually relates to an operating purpose other than profit alone (for example, to generate income while a firm has temporarily excess cash, to invest in a firm with potential new technologies). The holding period of securities available for sale is typically measured in days, months, or years. c. Amortized acquisition cost equals the purchase price of debt securities plus or minus amortization of any difference between acquisition cost and maturity value. Amortized acquisition cost bears no necessary relation to the market value of the debt security during the periods subsequent to acquisition. The market value of a debt security depends on the risk characteristics of the issuer, the provisions of the debt security with respect to interest rate, term to maturity, and similar factors, and the general level of interest rates in the economy.
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Odd-numbered Solutions 11-2 11.3 continued. d. Unrealized holding gains and losses occur when the market value of a security changes while the firm holds the security. The unrealized holding gain or loss on trading securities appears in the income statement each period, whereas it appears in Accumulated Other Comprehensive Income, a separate shareholders’ equity account, each period for securities available for sale. e. Realized gains and losses appear in the income statement when a firm sells a security. The realized gain or loss on trading securities equals the selling price minus the market value of the security on the most recent balance sheet. The realized gain or loss on securities available for sale equals the selling price minus the acquisition cost of the security.
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