Marketable Securities Flashcards
What are the most important aspect of marketable securities management?
Beyond achieving an optimal risk and after-tax return trade-off, the most important aspects of marketable securities management are liquidity and safety
Liquidity is the ability to convert an investment into cash quickly and without loss of principal
Marketable securities management thus concerns low-yield, low risk instruments that are traded on highly active markets (money market instruments). An entity also must consider whether the maturities of marketable securities match the needs for the cash
What is the money market?
The money market is the market for short-term investments where firms invest their temporary surpluses of cash. The money market is the market for short-term investments where firms invest their temporary surpluses of cash
The money market is NOT formally organized, but consists of many financial institutions, firms and government agencies offering many instruments of various risk levels and short to medium range maturities
What are characteristics of U.S. Treasury obligations?
U.S. Treasury obligations are:
- The safest investment
- Exempt from state and local taxation
- Highly liquid
What are Treasury bill (T-bills)?
Treasury bills (T-bills) have maturities of 1 year or less
Rather than bear interest, they are sold on a discount basis
What are Treasury notes (T-notes)?
Treasury notes (T-notes) have maturities of 1 year to 10 years. They provide the lender with an interest payment every 6 months
What are Treasury bonds (T-bonds)?
Treasury bonds (T-bonds) have maturities of 10 years or longer. They provide the lender with an interest payment every 6 months
What are Repurchase agreements (repos)?
Repurchase agreements (repos) are a means for dealers in government securities to finance their portfolios. When a firm buys a repo, it is temporarily purchasing some of the dealer’s government securities
The dealer agrees to repurchase them at a later time for a specific (higher) price. In essence, the firm gives the securities dealer a secured, short-term loan
Maturities vary from overnight to a few days
What are characteristics of federal agency securities?
Federal agency securities are backed by either:
a. The full faith and credit of the U.S. government
b. Only by the issuing agency
What obligations are backed by the U.S. Treasury?
Obligations of the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae) are backed by the U.S. Treasury
What obligations are implicitly guaranteed by the federal government?
Obligations of such government-sponsored enterprises (GSEs) as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which issued mortgage-backed securities are officially backed only by the agencies. But they are implicitly guaranteed by the federal government
What are the advantages of using Bankers’ acceptances?
Bankers’ acceptances are drafts drawn by a nonfinancial firm on deposits at a bank
One advantage is that the acceptance by the bank is a guarantee of payment at maturity. The payee can rely on the creditworthiness of the bank rather than on that of the (presumably riskier) drawer
A second advantage is that (because they are backed by the prestige of a large bank) these instruments are highly marketable once they have been accepted
What is Commercial paper?
Commercial paper consists of unsecured, short-term notes issued by large companies that are very good credit risks
What are Certificates of deposit (CDs)?
Certificates of deposit (CDs) are a form of savings deposit that cannot be withdrawn before maturity without a high penalty
CDs often yield a lower return than commercial paper and bankers’ acceptances because they are less risky
Negotiable CDs are typically issued in a denomination of $100K and traded in a secondary market under the regulation of the Federal Reserve system
What are Euro-dollars?
Euro-dollars are time deposits of U.S. dollars in banks located abroad
What are money-market mutual funds?
Money-market mutual funds invest in short-term, low-risk securities. In addition to paying interest, these funds allow investors to write checks on their balances
