Marketable Securities Management quiz Managerial Accounting Quiz Share Marketable Securities Management 11 questions in 15 minutes Pass Score 70% 1 / 11 Short-term securities issued by the Federal Housing Administration are known as : Bankers’ acceptances Agency securities Commercial paper Repurchase agreements A short-term security issued by a corporation or agency created by the U.S.government, such as the Federal Housing Administration, is an agencysecurity (agency issue). Among the largest issuers of agency securities(excluding the Treasury) are the Federal Home Loan Banks, the FederalNational Mortgage Association (Fannie Mae), and the other entities thatprovide credit to farmers and home buyers. Other issuers of homemortgage-backed securities include the Government National MortgageAssociation (Ginnie Mae) and the Federal Home Loan MortgageCorporation (Freddie Mac). 2 / 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 : $94 $97 $100 $93 The 6% discount rate is multiplied times the face amount of the Treasurybill to determine the amount of interest the lender will earn. The interest onthis Treasury bill is $3 ($100 × 6% × .5 year). Thus, the purchase price is$97 ($100 – $3). 3 / 11 When managing cash and short-term investments, a corporate treasurer is primarily concerned with : Maximizing rate of return Liquidity and safety Investing in Treasury bonds since they have no default risk Minimizing taxes 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 tofacilitate routine operations of the company. These assets are not held for purposes of achieving investment returns. 4 / 11 In smaller businesses in which the management of cash is but one of numerous functions performedby the treasurer, various cost incentives and diversification arguments suggest that surplus cashshould be invested in : Corporate bonds Money market mutual funds Commercial paper Bankers’ acceptances A small firm with surplus cash should invest for the highest return andlowest risk. The ability to convert the investment into cash without a lossof principal is also important. Money market mutual funds invest in moneymarket certificates such as treasury bills, negotiable CDs, and commercialpaper. Because of diversification, these mutual funds are superior to anysingle instrument. 5 / 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-terminvestment. Examples include U.S. Treasury bills, Eurodollars, commercialpaper, money- market mutual funds with portfolios of short-term securities,bankers’ acceptances, floating rate preferred stock, and negotiable CDs ofU.S. banks. A convertible bond is not a short-term investment because itsmaturity date is usually more than 1 year in the future and its price can beinfluenced substantially by changes in interest rates or by changes in theinvestee’s stock price. 6 / 11 The best example of a marketable security with minimal risk would be : Municipal bonds The common stock of an AAA-rated company The commercial paper of an AAA-rated company Gold Of the choices given, the commercial paper of a top-rated (mostcreditworthy) company has the least risk. Commercial paper is preferableto stock or stock options because the latter represent only a residual equityin a corporation. Commercial paper is debt and thus has priority overshareholders’ claims. Also, commercial paper is a very short-terminvestment. The maximum maturity allowed without SEC registration is270 days. However, it can be sold only to sophisticated investors withoutregistration. 7 / 11 Which one of the following instruments would be least appropriate for a corporate treasurer to utilizefor temporary investment of cash? Municipal bonds U.S. Treasury bills Money market mutual funds Commercial paper Bonds are long-term financial instruments. Thus, they are an inappropriatetemporary investment of cash. 8 / 11 A firm is interested in purchasing a $100 U.S. Treasury bill and was presented with the followingoptions: 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 bechosen, assuming a 360-day year? Option 1 Option 3 Option 2 Option 4 To determine the amount of interest the lender will earn, the 3.5% discountrate is multiplied by the face amount of the Treasury bill. The interest onthis Treasury bill is $3.50 ($100 × 3.5% × 1 year). Thus, the purchase priceis $96.50 ($100 – $3.5) 9 / 11 A corporation is considering the following opportunities to purchase an investment at the following amountsand 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 270 day investment 360 day investment The first step is to calculate the nominal return that each investment willprovide: 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% 10 / 11 Which security is most often held as a substitute for cash? Common stock Gold AAA corporate bonds Treasury bills A Treasury bill is a short-term U.S. government obligation that is sold at adiscount from its face value. A Treasury bill is highly liquid and nearlyrisk-free, and it is often held as a substitute for cash. 11 / 11 Which one of the following statements best characterizes U.S. Treasury bills? They have no coupon rate, no interest rate risk, and are issued at par They have an active secondary market, the interest received is exempt from federal income tax, and there is no interest rate risk 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 Statesgovernment, and the interest received is subject to federal income tax. 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
