Flashcards in Working Capital - Short-Term Securities Deck (4):
Temporary excess cash; invest
Earn a greater return than that would be provided by idle cash.
Considerations short-term investments
Safety of principal - Should have little risk of default. Default risk is a measure of likelihood that issuer will not be able to make future interest and/or principal payments to a security holder
Price stability - Should not be subject to market price declines that would result in significant losses if securities were sold for cash
Marketability/liquidity - Investments should have a ready market for converting securities to cash without incurring undue cost (liquidating securities)
Investment opportunities in money market
US Treasury Bills - Virtually risk-free; increments of 5k with minimum 10k investment; 3 months - 6 months - 1 year
Federal agency securities - Securities are obligations of a federal gov agency (Fannie Mae, Federal Land Bank). Are not backed by good faith and credit of federal government; slightly more risk than treasury
Negotiable COD - issued by banks in return for a fixed time deposit with bank. Can be brought or sold on secondary market unlike conventional COD.
Bankers' acceptances - draft (order to pay) drawn on a specific bank by a firm which has an account with the bank. Primary use is on financing foreign transactions. 30-180
Commercial paper - short-term unsecured promissory note issued by large, establish firms with high credit ratings few days - 270.
Repos - firm makes an investment (loan) and enters into a commitment to resell the security at the original contract price plus agreed interest for holding period. Large denominations and have specified maturities. a. The time of the agreement (maturity) can be adjusted to any length, including as short as one day.
b. Since the agreement provides for resale of the investment at the original price (plus interest), the risk of market price declines is avoided.