This audio will introduce you to debt securities, and equity securities.
Debt security is any security representing, a creditor relationship with an entity. Investments in debt securities, are classified into three categories, first, trading securities, second, available for sale securities, and third, held to maturity securities.
Debt securities includes corporate debt, convertible bonds, US Treasury securities, municipal securities, redeemable preferred stock and commercial paper. Debt security excludes, unsecured trade receivables, consumer loans and, note receivables, because, they are not normally traded on organized exchanges.
Equity securities, includes ownership interest, rights to acquire ownership interests, and rights to dispose ownership interests.
Ownership interests can be common, preferred, and other types of capital stock. Rights to acquire ownership interests, can be in form of rights, warrants and call options. Rights to dispose of ownership interests, can be in form of put options.
At 20% or more ownership, the investor is presumed, to be able to significantly influence the operating, or financial decisions of the investee. At more than 50% ownership, the investor has control, because of its majority in ownership of voting stock.
The equity method of accounting, is used for investments resulting in significant influence. When investor has control consolidated financial statements are prepared.
Securities are recorded at cost, including broker’s fees and taxes. This amount, is the best estimate of fair value, at acquisition. Cost equals, the cash paid in cash transactions. In non-cash transactions, cost equals the fair value of either security received, or, the fair value of resources sacrificed, whichever is more clearly determinable.
The fair value of debt security equals, the present value, of their future cash inflows. The present value is calculated, using the current market rate of interest for similar instruments with similar risks. Any accrued interest, is accounted for separately.
The fair value of equity security, must be readily determinable from quotes, obtainable from a securities exchange, or, from the over the counter market.
Investments which are considered to be non-tradeable, or, investments which do not have determinable fair values, should be carried at costs, and adjusted, only for permanent declines in value.