Final answer:
Management must classify financial instruments into trading, available-for-sale, or held to maturity while considering the risk involved, expected returns, and liquidity. Banks as financial intermediaries help coordinate supply and demand in financial markets, offering insured accounts to mitigate risks. The market type (primary or secondary) also affects liquidity and selling options.
Step-by-step explanation:
The question focuses on the internal control procedures that management needs to implement for the proper classification of financial instruments into categories such as trading, available-for-sale, or held to maturity. When management is classifying financial instruments, it is crucial to analyze the risks involved in different types of financial assets since these affect their value and the returns expected from them. Investments can be categorized by average expected return, degree of risk, and liquidity. An important consideration for investors is balancing these factors to ensure that their financial goals and risk tolerance are aligned with their investment choices. Banks, serving as financial intermediaries, mitigate some of these risks through mechanisms such as FDIC insurance, which protects against bank failures. Investors must also consider whether the financial market they are engaging with is a primary or secondary market, as this impacts liquidity and the ability to sell the asset. Thus, the classification of financial instruments is significant as it influences investment decisions, risk assessment, and the capital market dynamics.