Short-Term Investment Criteria Flashcards
You were recently elected as the Treasurer of Community Services, Inc., a large local not-for-profit organization. At the first meeting of the Board of Directors that you attended, the bookkeeper for the organization reported that the entity’s non-interest bearing checking account held $100,000 that likely would not be needed for at least the next three months. According to the bookkeeper, exactly when the cash will be needed for operating purposes will depend on the results of on-going fund-raising efforts, but past experience has been that the funds will be needed during the next twelve months. She asked the Board if the funds should be left in the checking account or invested in some way.
In response, the Chairman of the Board recommended that a decision on the question be delayed until the next Board meeting in four weeks so that the alternatives could be considered more completely. All members of the Board agreed. Further, the Chairman noted that, because most members of the Board were not familiar with making direct investments, additional information about making such investments would be helpful. She asked that you prepare and email to each Board member a brief memorandum identifying the major factors that should be considered in making an investment of the organization’s donated funds that are not immediately needed and identify some possible investments that may be appropriate given those factors. You agree to do so.
Prepare an email that identifies for the Board members the factors that should be taken into account in deciding an appropriate investment instrument for the organization’s current excess donated cash and identify some of the kinds of investments that satisfy those factors.
What is the most important consideration?
-The most important consideration in selecting an investment is safety of the amount of the investment (i.e., the principal).
-The investment should have little or no risk of default by the issuer.
-Since the funds we will be investing came from donations and the donors expect the funds be used for the intended purpose, it is particularly important that they not be at risk of loss in amount from inappropriate investments.
-Safety of investment principal can be obtained by investments in bank savings accounts, certificates of deposit, money market accounts and certain government-issued securities (e.g., Treasury notes and bills).
You were recently elected as the Treasurer of Community Services, Inc., a large local not-for-profit organization. At the first meeting of the Board of Directors that you attended, the bookkeeper for the organization reported that the entity’s non-interest bearing checking account held $100,000 that likely would not be needed for at least the next three months. According to the bookkeeper, exactly when the cash will be needed for operating purposes will depend on the results of on-going fund-raising efforts, but past experience has been that the funds will be needed during the next twelve months. She asked the Board if the funds should be left in the checking account or invested in some way.
In response, the Chairman of the Board recommended that a decision on the question be delayed until the next Board meeting in four weeks so that the alternatives could be considered more completely. All members of the Board agreed. Further, the Chairman noted that, because most members of the Board were not familiar with making direct investments, additional information about making such investments would be helpful. She asked that you prepare and email to each Board member a brief memorandum identifying the major factors that should be considered in making an investment of the organization’s donated funds that are not immediately needed and identify some possible investments that may be appropriate given those factors. You agree to do so.
Prepare an email that identifies for the Board members the factors that should be taken into account in deciding an appropriate investment instrument for the organization’s current excess donated cash and identify some of the kinds of investments that satisfy those factors.
What other two factors should be considered?
-Liquidity and price stability.
-Investment should be in an instrument that is highly liquid.
-Investment should be in an instrument that has price stability.
-That means that the investment instrument should not subject to swings in value that may result in a loss if a quick conversion to cash is necessary.
-Since the length of the investment depends on the outcome of future fund-raising, and therefore may need to be converted to cash on short notice at any time during the next year, our investment should be in a form that can be quickly converted to cash without loss of value or without incurring significant cost to convert to cash.
-Investments in Treasury debt instruments, however, carry the risk that changes in the market rate of interest may decrease their market value prior to maturity.
You were recently elected as the Treasurer of Community Services, Inc., a large local not-for-profit organization. At the first meeting of the Board of Directors that you attended, the bookkeeper for the organization reported that the entity’s non-interest bearing checking account held $100,000 that likely would not be needed for at least the next three months. According to the bookkeeper, exactly when the cash will be needed for operating purposes will depend on the results of on-going fund-raising efforts, but past experience has been that the funds will be needed during the next twelve months. She asked the Board if the funds should be left in the checking account or invested in some way.
In response, the Chairman of the Board recommended that a decision on the question be delayed until the next Board meeting in four weeks so that the alternatives could be considered more completely. All members of the Board agreed. Further, the Chairman noted that, because most members of the Board were not familiar with making direct investments, additional information about making such investments would be helpful. She asked that you prepare and email to each Board member a brief memorandum identifying the major factors that should be considered in making an investment of the organization’s donated funds that are not immediately needed and identify some possible investments that may be appropriate given those factors. You agree to do so.
Prepare an email that identifies for the Board members the factors that should be taken into account in deciding an appropriate investment instrument for the organization’s current excess donated cash and identify some of the kinds of investments that satisfy those factors.
What factors can be overlooked?
-Non-taxability of income from the investment is not a consideration.
-Diversification of our investment is not a significant concern.
-The nature of the investments that satisfy our investment criteria should all have little or no cost of administering.
