Question

In: Finance

What is the difference between a fixed income security and a variable income security, and which...

  1. What is the difference between a fixed income security and a variable income security, and which would get preference upon the liquidation of a company?
  2. If a company has some extra cash that is lying idle and wants liquidity and safety in a government investment, what type of investment is likely to be chosen?
  3. What types of backing are given by firms for their debt instruments?

Solutions

Expert Solution

Fixed income securities generally provides with the fixed rate of return after a particular periodic time whereas in variable income security, the returns are based upon certain particular criteria that will keep on fluctuating the value of money each and every day so, there is no fixation in amount that an investor will earn.

Example of fixed securities are bonds while the example of variable securities are common stocks. In the event of liquidation fixed income securities will get the preference over claim of the Asset than the variable income security.

If company has extra cash that is idle and it wants liquidity and safety in government investment, it should invest in TREPS and short term treasury bills as they both have the government backing.

Backings given by firm for their debt instruments would be in the form of long term assets such as fixed assets and long term receivables from investment projects. It will also provide with periodic debt repayment in the form of interest.


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