ANSWER ALL PARTS!!!! A B C D 1 3 6 Managing In Financial Markets Money Market Po

Question

ANSWER ALL PARTS!!!!
A B C D 1 3 6

Managing In Financial Markets

Money Market Portfolio Dilemma- As the treasurer of a corporation, one of your jobs is to maintain investments in liquid securities such as Treasury securities and commercial paper. Your goal is to earn as high a return as possible but without taking much of a risk.

a.The yield curve is currently upward sloping, such that 10-year Treasury bonds have an annualized yield 3 percentage points above the annualized yield of three-month T-bills. Should you consider using some of your funds to invest in 10-year Treasury securities?

b.Assume that you have substantially more cash than you would possibly need for any liquidity problems. Your boss suggests that you consider investing that excess funds in some money market securities that have a higher return than short-term Treasury securities, such as negotiable certificates of deposit (NCDs). Even though NCDs are less liquid, this would not cause a problem if you have more funds than you need. Given the situation, what use of the excess funds would benefit the firm the most?

c.Assume that commercial paper is currently offering an annualized yield of 7.5 percent, while Treasury securities are offering an annualized yield of 7 percent. Economic conditions have been stable, and you expect conditions to be very favorable over the next six months. Given this situation, would you prefer to hold T-bills or a diversified portfolio of commercial paper issued by various corporations?

d.Assume that commercial paper typically offers a premium of 0.5 percent above the T-bills rate. Given that your firm typically maintains about $10 million in liquid funds, how much extra will you generate per year by investing in commercial paper versus T-bills? Is this extra return worth the risk that the commercial paper could default?

Problems 1, 3, 6

1. T-Bill Yield- Assume an investor purchased a six-month T-bill with a $10,000 par value for $9,000 and sold it 90 days later for $9,100. What is the yield?

3. Commercial Paper Yield- Assume an investor purchased a six-month commercial paper with a face value of $1 million for $940,000. What is the yield?

6.    T-Bill Yield- The Treasury is selling 91-day T-bills with a face value of $10,000 for $9,900. If the investor holds them until maturity, calculate the yield.

Explanation / Answer

a.   The yield curve is currently upward sloping, such that 10-year Treasury bonds have an annualized yield 3 percentage points above the annualized yield of three-month T-bills. Should you consider using some of your funds to invest in 10-year Treasury securities?

            No, unless you are willing to bear the risk. Ten-year Treasury bonds are subject to a high degree of interest rate risk. If interest rates rise, the value of the bonds will decline. If you have to liquidate the Treasury securities after their value has declined, you may have to take a loss on your investment. Even though these securities are free from default risk, they can still generate significant losses, especially when a Treasurer may need to liquidate them on short notice.

      b.   Assume that you have substantially more cash than you would possibly need for any liquidity problems. Your boss suggests that you consider investing the excess funds in some money market securities that have a higher return than short-term Treasury securities, such as negotiable certificates of deposit (NCDs). Even though NCDs are less liquid, this would not cause a problem if you have more funds than you need. Given the situation, what use of the excess funds would benefit the firm the most?

            The excess funds should not be invested in money market securities. If these funds are not needed for liquidity purposes, they should be used to support the firm

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