Classifying securities. Firms that do not elect the fair value option classify marketable securities along two dimensions:
• Purpose of investment: debt securities held to maturity, trading securities, or securities available for sale.
• Length of expected holding period: current asset (Marketable Securities) or noncurrent asset (Investment in Securities).
Classify each of the securities below along each of these two dimensions.
a. A forest products company plans to construct a pulp-processing plant beginning in April of next, ear. It issues common stock for $200 million on December 10 of this year to help finance construction. The company invests this $200 million in U.S. government debt securities to generate income until it needs the cash for construction.
b. An electric utility has bonds payable outstanding for $l00 million that mature in five years. The electric utility acquires U.S. government bonds that haw a maturity value of $100 million in five years. The firm plans to use the proceeds from the government bonds to repay its own outstanding bonds.
c. A commercial bunk acquires bonds of the state of New York to generate tax-exempt interest revenue. The bank plans to sell the bonds when it needs cash for loans and other ongoing operating needs.
d. A pharmaceutical company acquires common stock of a biogenetic engineering company that conducts research in human growth hormones. The pharmaceutical company hopes the investment will lead to strategic alliances or joint ventures in the future.
e. A commercial bank maintains a department that regularly purchases and sells securities on stock exchanges around the world. This department acquires common stock of Nissan Motors on the New York Stock Exchange because it thinks the market price does not fully reflect favorable news about Nissan.
f. A U.S. computer company has bonds outstanding that are payable in Swiss francs. The bonds mature in installments during the next five years. The computer company purchases a Swiss winery’s bonds, denominated in Swiss francs, that mature in years. The computer company will sell a portion of the bonds of the Swiss winery each year to obtain the Swiss francs needed to repay its franc-denominated bonds.