Investing Surplus Funds Flashcards
CHAPTER 21
Reason to hold cash : Transaction motive
Meet its regular commitments :
- Pay supplier
- Pay wages
- Taxes
- Annual dividend
Relative performance
= Profit / Net assets
Compare 2 company with same profit but different net asset
One with higher RP –> making more profit out of more limited resources
Legal restrictions on investment
- Public money (taxpayers) invested by public sector (local gov)
- Money is invested by a company on behalf of personal investor (pension scheme)
- Case of trusts
Right issue
Offering of rights to the existing shareholders of a company that gives them an opportunity to buy additional shares directly from the company at a discounted price rather than buying them in the secondary market
Finance company deposit VS Bank deposit
Offer slightly higher return than average
High interest VS Option deposit a/c
High interest –> immediate access
Option deposit –> can’t withdraw until reach maturity
Money market deposit account [MMDA]
Deposit a/c offered by a bank which invests in stocks & bonds
Pay interest based on current interest rate in money market
Can be withdrawn/Liquid
Money market deposit account [MMDA] : Risk
- Variable rate
- Restriction on number of transaction
- Inflation
Certificates of Deposit [CD]
Certificate indicating money deposited with bank and will be repaid later (Min : $50,000)
Negotiable
Ownership is transferred by physical delivery
Certificates of Deposit [CD] : Risk & Return
- Attractive rate of interest
- Easily sold
- Liquidity (major advantage agains MMDA fixed)
Gilts
- Mostly fixed interest
- Can be ST,MT,LT & undated
- Lowest risk
- Face value : $100
UK Local Authority Stock
- Higher return
- Not safe as gilt
- Issue yearlings (a local authority bond which must be paid back in 1/2 years)
Effect of risk
Income –> Cash investment
Capital -> Gilt /marketable fixed interest stock
Capital & Income –> Share
Treasury bills
- ST financial instrument
- Issued by government
- Issued at a discount on its redemption price
- Low risk
- No interest
Example :
Investor purchase a three-month bill with a par value of £1000. He pays £950 at the time of purchase, receiving the full £1000 in return when the three-month maturity period has ended
∴ $50 is the return
Private sector
Entities privately owned by individuals and organisations that invest capital to maximise owner wealth
Public sector
- Entities created by the constitution and laws of a country to govern its citizens
- Its investments aim to provide public goods and services to its constituents
Source of funds for private entity
- Debt (Loans)
- Equity (Owners; shareholders)
Source of funds for public entity
- Taxes
- Debt (public borrowings)
Financial instruments (securities)
Contracts that can be purchased and sold
Money market instruments
Financial instruments that are highly liquid
