Marketable Securities Management quiz Financial Accounting Quiz On Oct 15, 2024 Share /11 1234567891011 Marketable Securities Management 11 questions in 15 minutes Pass Score 70% 1 / 11 When managing cash and short-term investments, a corporate treasurer is primarily concerned with : Minimizing taxes Investing in Treasury bonds since they have no default risk Liquidity and safety Maximizing rate of return Cash and short-term investments are crucial to a firm’s continuing success. Sufficient liquidity must be available to meet payments as they come due. At the same time, liquid assets are subject to significant control risk. Therefore, liquidityand safety are the primary concerns of the treasurer when dealing with highly liquid assets. Cash and short-term investments are held because of their ability to facilitate routine operations of the company. These assets are not held for purposes of achieving investment returns. 2 / 11 Which one of the following instruments would be least appropriate for a corporate treasurer to utilize for temporary investment of cash? U.S. Treasury bills Municipal bonds Commercial paper Money market mutual funds Bonds are long-term financial instruments. Thus, they are an inappropriate temporary investment of cash. 3 / 11 Short-term securities issued by the Federal Housing Administration are known as : Repurchase agreements Bankers’ acceptances Commercial paper Agency securities A short-term security issued by a corporation or agency created by the U.S. government, such as the Federal Housing Administration, is an agency security (agency issue). Among the largest issuers of agency securities (excluding the Treasury) are the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the other entities thatprovide credit to farmers and home buyers. Other issuers of home mortgage-backed securities include the Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). 4 / 11 The best example of a marketable security with minimal risk would be : The common stock of an AAA-rated company Municipal bonds Gold The commercial paper of an AAA-rated company Of the choices given, the commercial paper of a top-rated (most creditworthy) company has the least risk. Commercial paper is preferable to stock or stock options because the latter represent only a residual equity in a corporation. Commercial paper is debt and thus has priority over shareholders’ claims. Also, commercial paper is a very short-term investment. The maximum maturity allowed without SEC registration is 270 days. However, it can be sold only to sophisticated investors without registration. 5 / 11 Which security is most often held as a substitute for cash? Gold AAA corporate bonds Treasury bills Common stock A Treasury bill is a short-term U.S. government obligation that is sold at a discount from its face value. A Treasury bill is highly liquid and nearly risk-free, and it is often held as a substitute for cash. 6 / 11 All of the following are alternative marketable securities suitable for investment except : Commercial paper U.S. Treasury bills Convertible bonds Eurodollars Marketable securities are near-cash items used primarily for short-term investment. Examples include U.S. Treasury bills, Eurodollars, commercial paper, money- market mutual funds with portfolios of short-term securities, bankers’ acceptances, floating rate preferred stock, and negotiable CDs of U.S. banks. A convertible bond is not a short-term investment because its maturity date is usually more than 1 year in the future and its price can be influenced substantially by changes in interest rates or by changes in the investee’s stock price. 7 / 11 In smaller businesses in which the management of cash is but one of numerous functions performed by the treasurer, various cost incentives and diversification arguments suggest that surplus cash should be invested in : Corporate bonds Bankers’ acceptances Money market mutual funds Commercial paper A small firm with surplus cash should invest for the highest return and lowest risk. The ability to convert the investment into cash without a loss of principal is also important. Money market mutual funds invest in money market certificates such as treasury bills, negotiable CDs, and commercial paper. Because of diversification, these mutual funds are superior to any single instrument. 8 / 11 A firm is interested in purchasing a $100 U.S. Treasury bill and was presented with the following options: Annual Discount Rate Due Date Yearly Rates Option 1 180 days 6% Option 2 360 days 3.50% Option 3 120 days 8% Option 4 240 days 4.50% If the firm wishes to buy the Treasury bill at the lowest purchasing price, which option should be chosen, assuming a 360-day year? Option 4 Option 2 Option 3 Option 1 To determine the amount of interest the lender will earn, the 3.5% discount rate is multiplied by the face amount of the Treasury bill. The interest on this Treasury bill is $3.50 ($100 × 3.5% × 1 year). Thus, the purchase price is $96.50 ($100 – $3.5) 9 / 11 Assuming a 360-day year, the current price of a $100 U.S. Treasury bill due in 180 days on a 6% discount basis is : $97 $100 $93 $94 The 6% discount rate is multiplied times the face amount of the Treasury bill to determine the amount of interest the lender will earn. The interest on this Treasury bill is $3 ($100 × 6% × .5 year). Thus, the purchase price is $97 ($100 – $3). 10 / 11 Which one of the following statements best characterizes U.S. Treasury bills? They have an active secondary market, the interest received is exempt from federal income tax, and there is no interest rate risk They have no coupon rate, no interest rate risk, and are issued at par They have an active secondary market, 1- to 24-month maturities, and monthly interestpayments They have no coupon rate, no default risk, and interest received is subject to federal income tax U.S. Treasury bills have no coupon rate because they are sold at a discount. They are backed by the full faith and credit of the United States government, and the interest received is subject to federal income tax. 11 / 11 A corporation is considering the following opportunities to purchase an investment at the following amounts and discounts: Term Amount Discount 90 days 80,000 5% 180 days 75,000 6% 270 days 100,000 5% 360 days 60,000 10% Which opportunity offers the corporation the highest annual yield? 90 day investment 180 day investment 360 day investment 270 day investment The first step is to calculate the nominal return that each investment will provide: Term Amount Invested Discount Nominal Return (Amount Invested × Discount ) 90 days 80,000 5% 4000 180 days 75,000 6% 4500 270 days 100,000 5% 5000 360 days 60,000 10% 6000 The next step is to restate the nominal returns on an annualized basis: Term Nominal Return Fraction of Year Annualized Return 90 days 4,000 ÷ (90 ÷ 360) = $16,000 180 days 4,500 ÷ (180 ÷ 360) = 9,000 270 days 5,000 ÷ (270 ÷ 360) = 6,667 360 days 6,000 ÷ (360 ÷ 360) = 6,000 The final step is to calculate the annual yield of each investment. Term Annualized Return Amount Invested Annual Yield 90 days 16,000 ÷ 80,000 = 20.0% 180 days 9,000 ÷ 75,000 = 12.0% 270 days 6,667 ÷ 100,000 = 6.7% 360 days 6,000 ÷ 60,000 = 10.0% Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback are marketable securities current assetscash and marketable securities managementcash and marketable securities management questions and answers