In Considering Whether a Company Should Invest in Debt or Equity

question 64

Multiple Choice

In considering whether a company should invest in debt or equity securities of another company,which of the following statements is incorrect?

• A)The company wants to make the best use of its excess cash to generate investment income.
• B)Investment income consists of interest earned from equity securities and dividends earned from debt investments.
• C)Investment income includes increases in the market value of debit or equity securities.
• D)The excess cash that can be invested could be the result of temporary or seasonal business fluctuations.

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Definitions:

Inverted Yield Curve

An inverted yield curve occurs when long-term debt instruments have a lower yield than short-term debt instruments, often considered a forewarning of economic recession.

Convertible Bonds

Bonds issued by a corporation that can be converted into a predetermined number of the company's shares at certain times during the bond's life, usually at the discretion of the bondholder.

Bond Yields

The return an investor realizes on a bond, calculated as the annual interest payment divided by the bond's current market price.

Term Structure

The relationship between interest rates (or yields) and different maturities of debt securities, often depicted as a curve.