Distinguish between a debt security and an equity security:
A debt security can be classified as held-to-maturity; however an equity security has no maturity date. Furthermore, a debt security can easily by either bought or sold between two parties. Examples of debt securities include: municipal bonds, CDs, CDOs, and corporate bonds.

What are the main distinctions between a traditional financial instrument and a derivative financial instrument?
Three basic characteristics of derivative financial instruments distinguish derivatives from traditional financial instruments: (i) The instrument has one or more underlyings and an identified payment provision; (ii) The instrument requires little or no investment at the inception of the contract; (iii) The instrument requires or permits net settlement.

Trading securities:
Example – A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold.

Held-to-maturity securities:
Example – 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock.

Example – Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.

Example – A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now.

Available-for-sale securities:
Example – 10-year bonds were purchased this year. The bonds mature at the first of next year.

Example – Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold.