7.3 Marketable Securities Management Flashcards
Which one of the following instruments would be least appropriate for a corporate treasurer to utilize for temporary investment of cash?
A. U.S. Treasury bills.
B. Money market mutual funds.
C. Commercial paper.
D. Municipal bonds.
D. Municipal bonds.
Bonds are long-term financial instruments. Thus, they are an inappropriate temporary investment of cash.
Which one of the following statements best characterizes U.S. Treasury bills?
A. They have no coupon rate, no interest rate risk, and are issued at par.
B. They have an active secondary market, 1-to 24-month maturities, and monthly interest payments.
C. They have an active secondary market, the interest received is exempt from federal income tax, and there is no interest rate risk.
D. They have no coupon rate, no default risk, and interest received is subject to federal income tax.
D. They have no coupon rate, no default risk, and interest received is subject to federal income tax.
U.S. Treasury bills have no coupon rate because they are sold at a discount. They are backed by the full faith and credit of the United States government, and the interest received is subject to federal income tax.
When managing cash and short-term investments, a corporate treasurer is primarily concerned with
A. Maximizing rate of return.
B. Minimizing taxes.
C. Investing in Treasury bonds since they have no default risk.
D. Liquidity and safety.
D. Liquidity and safety.
Cash and short-term investments are crucial to a firm’s continuing success. Sufficient liquidity must be available to meet payments as they come due. At the same time, liquid assets are subject to significant control risk. Therefore, liquidity and safety are the primary concerns of the treasurer when dealing with highly liquid assets. Cash and short-term investments are held because of their ability to facilitate routine operations of the company. These assets are not held for purposes of achieving investment returns.
All of the following are alternative marketable securities suitable for investment except
A. U.S. Treasury bills.
B. Eurodollars.
C. Commercial paper.
D. Convertible bonds.
D. Convertible bonds.
Marketable securities are near-cash items used primarily for short-term investment. Example include U.S. Treasury bills, Eurodollars, commercial paper, money-market mutual funds with portfolio of short-term securities, banker’s acceptances, floating rate preferred stock, and negotiable CDs of U.S. banks. A convertible bond is not a short-term investment because its maturity date is usually more than 1 year in the future and its price can be influenced substantially by changes in interest rates or by changes in the investee’s stock price.
Which security is most often held as a substitute for cash?
A. Treasury bills.
B. Common stock.
C. Gold.
D. Aaa corporate bonds.
A. Treasury bills.
A Treasury bill is a short-term U.S. government obligation that is sold at a discount from its face value. A Treasury bill is highly liquid and nearly risk-free, and it is often held as a substitute for cash.
A firm is interest in purchasing a $100 U.S. Treasury bill and was presented with the following options:
Option1
Due date: 180 days, Yearly rates: 6%
Option 2
Due date: 360 days, Yearly rates: 3.5%
Option 3
Due date: 120 days, Yearly rates: 8%
Option 4
Due date: 240 days, Yearly rates: 4.5%
If the firm wishes to buy the Treasury bill at the lowest purchasing price, which option should be chosen, assuming 360-day year?
A. Option 4
B. Option 2
C. Option 3
D. Option 1
B. Option 2
To determine the amount of interest the lender will earn, the 3.5% discount rate is multiplied by the face amount of the Treasury bill. The interest on this Treasury bill is $3.50 ($100 x 3.5% x 1 year). Thus, the purchase price is $96.50 ($100 - $3.5).
