Short-Term Securities Management

Question 1

What are United States Treasury Bills (also called T-Bills)?

Answer 1

Debt investment instruments that are the direct obligation of the U.S. Government; considered to be virtually risk-free and commonly used as the basis for the risk-free rate of return in many financial analysis.

Question 2

Define “banker’s acceptance”.

Answer 2

A draft (or order to pay) drawn on a specific bank by a firm which has an account with the bank. If bank “accepts” the draft, it becomes a negotiable debt instrument of the bank.

Question 3

Define “commercial paper”.

Answer 3

Short-term unsecured promissory notes issued by large, established firms with high credit rating as a form of short-term financing (i.e., 270 days or less).

Question 4

Define “default risk”.

Answer 4

A measure of the likelihood that the issuer will not be able to make future interest and/or principal payments to a security holder.

Question 5

What are the major considerations in selecting short-term securities as investments?

Answer 5

1. Safety of principal
2. Price stability of the investment
3. Marketability of Liquidity of the Investment

Question 6

Define “repurchase agreement” (also called a “Repo”).

Answer 6

A debt investment instrument with a commitment by the buyer to resell the instrument to the seller at a specified price, which includes the original principal plus an interest or fee factor, at a specified time.