Cash and Marketable Securities Management
<ul><li>List and explain the motives for holding cash. </li></ul><ul><li>Understand the purpose of efficient cash manageme...
<ul><li>Motives for Holding Cash </li></ul><ul><li>Speeding Up Cash Receipts </li></ul><ul><li>S-l-o-w-i-n-g  D-o-w-n  Cas...
<ul><li>Outsourcing </li></ul><ul><li>Cash Balances to Maintain </li></ul><ul><li>Investment in Marketable Securities </li...
<ul><li>Transactions Motive   –  to meet payments arising in the ordinary course of business </li></ul><ul><li>Speculative...
Collections Disbursements Marketable securities investment Control through information reporting = Funds Flow = Informatio...
<ul><li>Expedite preparing and mailing the invoice </li></ul><ul><li>Accelerate the mailing of payments from customers </l...
Collection Float :  Total time between the mailing of the check by the customer and the availability of cash to the receiv...
Mail Float : Time the check is in the mail. Customer  mails check Firm receives check Mail Float
Processing Float : Time it takes a company to process the check internally. Firm deposits check Firm receives check Proces...
Availability Float : Time consumed in clearing the check through the banking system. Firm deposits check Firm’s bank accou...
Deposit Float : Time during which the check  received by the firm remains uncollected funds. Processing Float Availability...
<ul><li>Accelerate preparation and mailing of invoices </li></ul><ul><ul><li>computerized billing </li></ul></ul><ul><ul><...
<ul><li>Preauthorized debit  </li></ul><ul><li>The transfer of funds from a payor’s bank account on a specified date to th...
<ul><li>Traditional Lockbox </li></ul><ul><li>A post office box maintained by a firm’s bank that is used as a receiving po...
<ul><li>Customers are instructed to  mail  their remittances to the lockbox location. </li></ul><ul><li>Bank picks up remi...
<ul><li>Disadvantage </li></ul><ul><ul><li>Cost of creating and maintaining a  lockbox system. Generally, not advantageous...
<ul><li>Compensating Balance </li></ul><ul><ul><li>Demand deposits maintained by a firm to compensate a bank for services ...
<ul><ul><li>Reduces availability float associated with check clearing. </li></ul></ul><ul><li>Accounts Receivable Conversi...
<ul><li>Check Clearing for the 21 st  Century Act </li></ul><ul><ul><li>“ Check 21”: US, Federal law that facilitates elec...
<ul><li>Check 21 </li></ul><ul><li>Driven by September 11, 2001 attacks </li></ul><ul><li>Meant to foster innovation and e...
<ul><ul><ul><li>Improves control over inflows and outflows of corporate cash. </li></ul></ul></ul><ul><ul><ul><li>Reduces ...
<ul><ul><li>Definition :  A non-negotiable check payable to a single company account at a concentration bank. </li></ul></...
<ul><ul><li>Definition :  An electronic version of the depository transfer check (DTC). </li></ul></ul><ul><li>(1)  Electr...
<ul><ul><li>Definition :  A generic term for electronic funds transfer using a two-way communications system, like  Fedwir...
<ul><li>“ Playing the Float” </li></ul><ul><li>Control of Disbursements </li></ul><ul><ul><li>Payable through Draft (PTD) ...
<ul><li>You write a check today, which is subtracted from  your  calculation of the account balance. The check has not cle...
<ul><li>Solution : </li></ul><ul><li>Centralize payables into a single (smaller number of) account(s). This provides bette...
<ul><li>Delays the time to have funds on deposit to cover the draft. </li></ul><ul><li>Some suppliers prefer checks. </li>...
<ul><li>Many times a separate account is set up to handle each of these types of disbursements. </li></ul><ul><li>A distri...
F   M  T  W  H  F  M and after (Payday) Percent of Payroll Collected 100% 75% 50% 25% 0% The firm may plan on payroll chec...
<ul><li>Eliminates the need to accurately  estimate each disbursement account. </li></ul><ul><li>Only need to forecast ove...
<ul><li>Example:  A Vermont business pays a Maine supplier with a check drawn on a bank in Montana. </li></ul><ul><li>This...
<ul><li>Late check presentments are minimal, which allows more accurate predicting of disbursements on a day-to-day basis....
<ul><li>Messaging systems can be: </li></ul><ul><li>1.  Unstructured  – utilize technologies such as faxes and e-mails  </...
Electronic Data Interchange   – The movement of business data electronically in a structured, computer-readable format.  E...
Electronic Funds Transfer (EFT)  – the electronic movements of information between two depository institutions resulting i...
EFT Regulation <ul><li>In January 1999, a regulation that required ALL federal government payments be made electronically....
Financial EDI  – The movement of financially related electronic information between a company and its bank or between bank...
<ul><li>Costs </li></ul><ul><li>Computer hardware and software expenditures </li></ul><ul><li>Increased training costs to ...
<ul><li>Reducing and controlling operating costs  </li></ul><ul><li>Improve company focus (close 2 nd ) </li></ul><ul><li>...
<ul><li>Business Process Outsourcing (BPO) </li></ul><ul><li>A form of outsourcing in which the entire business process is...
<ul><li>The optimal level of cash should be the larger of: </li></ul><ul><ul><li>(1) The transaction balances required whe...
<ul><li>Note regarding the management of marketable securities. </li></ul><ul><li>Marketable Securities are  shown on the ...
<ul><li>Ready Cash Segment (R$) </li></ul><ul><li>Optimal balance of marketable securities held to take care of probable d...
<ul><li>Controllable Cash Segment (C$) </li></ul><ul><li>Marketable securities held for meeting controllable (knowable) ou...
<ul><li>Free Cash Segment (F$) </li></ul><ul><li>“ Free” marketable securities (that is, available for as yet unassigned p...
<ul><li>Marketability (or Liquidity) </li></ul><ul><ul><li>The ability to sell a significant volume of securities in a sho...
<ul><li>Maturity </li></ul><ul><li>Refers to the remaining life of the security. </li></ul><ul><li>Interest Rate (or Yield...
<ul><li>Treasury Bills (T-bills) : Short-term, non-interest bearing obligations of the US Treasury issued at a discount an...
<ul><li>BEY   = [ ( 1000   –   990 ) / ( 990 ) ] *[ 365 /  91   ] </li></ul><ul><li>BEY = 4.05%   </li></ul>T-Bills and Bo...
<ul><li>EAY = (1 + [ .0405 /(365 /  91) ]) 365/ 91   - 1 </li></ul><ul><li>EAY = 4.11%  </li></ul>T-Bills and Equivalent A...
<ul><li>Treasury Bonds : Long-term (more than 10 years’ original maturity) obligations of the US Treasury.  </li></ul><ul>...
<ul><li>Bankers’ Acceptances (BAs) : Short-term promissory trade notes for which a bank (by having “accepted” them) promis...
<ul><li>European Commercial Paper : See above, except maturities extend to one year and more active secondary market. </li...
<ul><li>Federal Agency Securities : Debt securities issued by federal agencies and government-sponsored enterprises (GSEs)...
<ul><li>Money Market Preferred Stock : Preferred stock having a dividend rate that is reset at auction every 49 days. </li...
<ul><li>Ready Cash Segment (R$) </li></ul><ul><li>Safety and ability to convert to cash is most important. </li></ul><ul><...
<ul><li>Controllable Cash Segment (C$) </li></ul><ul><li>Marketability less important.  Possibly match time needs. </li></...
<ul><li>Free Cash Segment (F$) </li></ul><ul><li>Base choice on yield subject to risk-return trade-offs. </li></ul><ul><li...
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Cash and marketable securities @ bec doms ppt

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Cash and marketable securities @ bec doms ppt

  1. 1. Cash and Marketable Securities Management
  2. 2. <ul><li>List and explain the motives for holding cash. </li></ul><ul><li>Understand the purpose of efficient cash management. </li></ul><ul><li>Describe methods for speeding up the collection of accounts receivable and methods for controlling cash disbursements. </li></ul><ul><li>Differentiate between remote and controlled disbursement, and discuss any ethical concerns raised by either of these two methods. </li></ul><ul><li>Discuss how electronic data interchange (EDI) and outsourcing each relates to a company’s cash collections and disbursements </li></ul><ul><li>Identify the key variables that should be considered before purchasing any marketable securities. </li></ul><ul><li>Define the most common money-market instruments that a marketable securities portfolio manager would consider for investment. </li></ul><ul><li>Describe the three segments of the marketable securities portfolio and note which securities are most appropriate for each segment and why. </li></ul>After Studying Chapter 9, you should be able to:
  3. 3. <ul><li>Motives for Holding Cash </li></ul><ul><li>Speeding Up Cash Receipts </li></ul><ul><li>S-l-o-w-i-n-g D-o-w-n Cash Payouts </li></ul><ul><li>Electronic Commerce </li></ul>Cash and Marketable Securities Management
  4. 4. <ul><li>Outsourcing </li></ul><ul><li>Cash Balances to Maintain </li></ul><ul><li>Investment in Marketable Securities </li></ul>Cash and Marketable Securities Management
  5. 5. <ul><li>Transactions Motive – to meet payments arising in the ordinary course of business </li></ul><ul><li>Speculative Motive – to take advantage of temporary opportunities </li></ul><ul><li>Precautionary Motive – to maintain a cushion or buffer to meet unexpected cash needs </li></ul>Motives for Holding Cash
  6. 6. Collections Disbursements Marketable securities investment Control through information reporting = Funds Flow = Information Flow Cash Management System
  7. 7. <ul><li>Expedite preparing and mailing the invoice </li></ul><ul><li>Accelerate the mailing of payments from customers </li></ul><ul><li>Reduce the time during which payments received by the firm remain uncollected </li></ul>Collections Speeding Up Cash Receipts
  8. 8. Collection Float : Total time between the mailing of the check by the customer and the availability of cash to the receiving firm. Processing Float Availability Float Mail Float Deposit Float Collection Float
  9. 9. Mail Float : Time the check is in the mail. Customer mails check Firm receives check Mail Float
  10. 10. Processing Float : Time it takes a company to process the check internally. Firm deposits check Firm receives check Processing Float
  11. 11. Availability Float : Time consumed in clearing the check through the banking system. Firm deposits check Firm’s bank account credited Availability Float
  12. 12. Deposit Float : Time during which the check received by the firm remains uncollected funds. Processing Float Availability Float Deposit Float
  13. 13. <ul><li>Accelerate preparation and mailing of invoices </li></ul><ul><ul><li>computerized billing </li></ul></ul><ul><ul><li>invoices included with shipment </li></ul></ul><ul><ul><li>invoices are faxed </li></ul></ul><ul><ul><li>advance payment requests </li></ul></ul><ul><ul><li>preauthorized debits </li></ul></ul>Earlier Billing
  14. 14. <ul><li>Preauthorized debit </li></ul><ul><li>The transfer of funds from a payor’s bank account on a specified date to the payee’s bank account; the transfer is initiated by the payee with the payor’s advance authorization. </li></ul>Preauthorized Payments
  15. 15. <ul><li>Traditional Lockbox </li></ul><ul><li>A post office box maintained by a firm’s bank that is used as a receiving point for customer remittances. </li></ul><ul><li>Electronic Lockbox </li></ul><ul><li>A collection service provided by a firm’s bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format. </li></ul>Lockbox Systems
  16. 16. <ul><li>Customers are instructed to mail their remittances to the lockbox location. </li></ul><ul><li>Bank picks up remittances several times daily from the lockbox. </li></ul><ul><li>Bank deposits remittances in the customers account and provides a deposit slip with a list of payments. </li></ul><ul><li>Company receives the list and any additional mailed items. </li></ul>* Based on the traditional lockbox system Lockbox Process*
  17. 17. <ul><li>Disadvantage </li></ul><ul><ul><li>Cost of creating and maintaining a lockbox system. Generally, not advantageous for small remittances. </li></ul></ul><ul><li>Advantage </li></ul><ul><ul><li>Receive remittances sooner which reduces processing float. </li></ul></ul>Lockbox System
  18. 18. <ul><li>Compensating Balance </li></ul><ul><ul><li>Demand deposits maintained by a firm to compensate a bank for services provided, credit lines, or loans. </li></ul></ul><ul><li>Cash Concentration </li></ul><ul><ul><li>The movement of cash from lockbox or field banks into the firm’s central cash pool residing in a concentration bank. </li></ul></ul>Concentration Banking
  19. 19. <ul><ul><li>Reduces availability float associated with check clearing. </li></ul></ul><ul><li>Accounts Receivable Conversion </li></ul><ul><ul><li>A process by which paper checks are converted into ACH debits at lockboxes or other collection sites. </li></ul></ul><ul><ul><li>So what is the Benefit of ARCs? </li></ul></ul>Collections Improvements
  20. 20. <ul><li>Check Clearing for the 21 st Century Act </li></ul><ul><ul><li>“ Check 21”: US, Federal law that facilitates electronic check exchange by enabling banks to exchange check image files electronically and, where necessary, to create legally equivalent paper “substitute checks” from images for presentment to banks that have not agreed to accept checks electronically. </li></ul></ul>Collections Improvements
  21. 21. <ul><li>Check 21 </li></ul><ul><li>Driven by September 11, 2001 attacks </li></ul><ul><li>Meant to foster innovation and encourage the move from paper checks to electronic payment processing to create cost and time benefits for financial institutions </li></ul><ul><li>Requires banks to accept substitute checks (a paper copy of an electronic image of both sides of the original check) as the legal equivalent of the original paper check </li></ul><ul><li>Cleared the legal path to allow ‘remote deposit capture’ </li></ul>Collections Improvements
  22. 22. <ul><ul><ul><li>Improves control over inflows and outflows of corporate cash. </li></ul></ul></ul><ul><ul><ul><li>Reduces idle cash balances to a minimum. </li></ul></ul></ul><ul><ul><ul><li>Allows for more effective investments by pooling excess cash balances. </li></ul></ul></ul><ul><ul><li>Moving cash balances to </li></ul></ul><ul><ul><li>a central location: </li></ul></ul>Concentration Banking
  23. 23. <ul><ul><li>Definition : A non-negotiable check payable to a single company account at a concentration bank. </li></ul></ul><ul><li>Funds are not immediately available upon receipt of the DTC. </li></ul><ul><ul><li>(1) Depository Transfer Check (DTC) </li></ul></ul>Concentration Services for Transferring Funds
  24. 24. <ul><ul><li>Definition : An electronic version of the depository transfer check (DTC). </li></ul></ul><ul><li>(1) Electronic check image version of the DTC. </li></ul><ul><li>(2) Cost is not significant and is replacing DTC. </li></ul><ul><ul><li>(2) Automated Clearinghouse (ACH) Electronic Transfer </li></ul></ul>Concentration Services for Transferring Funds
  25. 25. <ul><ul><li>Definition : A generic term for electronic funds transfer using a two-way communications system, like Fedwire . </li></ul></ul><ul><li>Funds are available upon receipt of the wire transfer. Much more expensive. </li></ul><ul><ul><li>(3) Wire Transfer </li></ul></ul>Concentration Services for Transferring Funds
  26. 26. <ul><li>“ Playing the Float” </li></ul><ul><li>Control of Disbursements </li></ul><ul><ul><li>Payable through Draft (PTD) </li></ul></ul><ul><ul><li>Payroll and Dividend Disbursements </li></ul></ul><ul><ul><li>Zero Balance Account (ZBA) </li></ul></ul><ul><li>Remote and Controlled Disbursing </li></ul>S-l-o-w-i-n-g D-o-w-n Cash Payouts
  27. 27. <ul><li>You write a check today, which is subtracted from your calculation of the account balance. The check has not cleared, which creates float. You can potentially earn interest on money that you have “spent.” </li></ul>Net Float -- The dollar difference between the balance shown in a firm’s (or individual’s) checkbook balance and the balance on the bank’s books. “ Playing the Float”
  28. 28. <ul><li>Solution : </li></ul><ul><li>Centralize payables into a single (smaller number of) account(s). This provides better control of the disbursement process. </li></ul>Firms should be able to : 1. shift funds quickly to banks from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements. Control of Disbursements
  29. 29. <ul><li>Delays the time to have funds on deposit to cover the draft. </li></ul><ul><li>Some suppliers prefer checks. </li></ul><ul><li>Banks will impose a higher service charge due to the additional handling involved. </li></ul>Payable Through Draft (PTD) : A check-like instrument that is drawn against the payor and not against a bank as is a check. After a PTD is presented to a bank, the payor gets to decide whether to honor or refuse payment. Methods of Managing Disbursements
  30. 30. <ul><li>Many times a separate account is set up to handle each of these types of disbursements. </li></ul><ul><li>A distribution schedule is projected based on past experiences. [See the next slide] </li></ul><ul><li>Funds are deposited based on expected needs. </li></ul><ul><li>Minimizes excessive cash balances. </li></ul>Payroll and Dividend Disbursements The firm attempts to determine when payroll and dividend checks will be presented for collection. Methods of Managing Disbursements
  31. 31. F M T W H F M and after (Payday) Percent of Payroll Collected 100% 75% 50% 25% 0% The firm may plan on payroll checks being presented in a similar pattern every pay period. Percentage of Payroll Checks Collected
  32. 32. <ul><li>Eliminates the need to accurately estimate each disbursement account. </li></ul><ul><li>Only need to forecast overall cash needs. </li></ul>Zero Balance Account (ZBA) : A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent. Methods of Managing Disbursements
  33. 33. <ul><li>Example: A Vermont business pays a Maine supplier with a check drawn on a bank in Montana. </li></ul><ul><li>This may stress supplier relations, and raises ethical issues. </li></ul>Remote Disbursement – A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time. This maximizes disbursement float. Remote and Controlled Disbursing
  34. 34. <ul><li>Late check presentments are minimal, which allows more accurate predicting of disbursements on a day-to-day basis. </li></ul>Controlled Disbursement – A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day. Remote and Controlled Disbursing
  35. 35. <ul><li>Messaging systems can be: </li></ul><ul><li>1. Unstructured – utilize technologies such as faxes and e-mails </li></ul><ul><li>2. Structured – utilize technologies such as electronic data interchange (EDI) . </li></ul>Electronic Commerce – The exchange of business information in an electronic (non-paper) format, including over the Internet. Electronic Commerce
  36. 36. Electronic Data Interchange – The movement of business data electronically in a structured, computer-readable format. EDI Electronic Funds Transfer (EFT) Financial EDI (FEDI) Electronic Data Interchange (EDI)
  37. 37. Electronic Funds Transfer (EFT) – the electronic movements of information between two depository institutions resulting in a value (money) transfer. EDI Subset Electronic Funds Transfer (EFT) Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS) Electronic Funds Transfer (EFT)
  38. 38. EFT Regulation <ul><li>In January 1999, a regulation that required ALL federal government payments be made electronically.* This: </li></ul><ul><ul><li>provides more security than paper checks and </li></ul></ul><ul><ul><li>is cheaper to process for the government. </li></ul></ul><ul><li>* Except tax refunds and special waiver situations </li></ul>Electronic Funds Transfer (EFT)
  39. 39. Financial EDI – The movement of financially related electronic information between a company and its bank or between banks. Financial EDI (FEDI) Examples include : Lockbox remittance information Bank balance information EDI Subset Financial EDI (FEDI)
  40. 40. <ul><li>Costs </li></ul><ul><li>Computer hardware and software expenditures </li></ul><ul><li>Increased training costs to implement and utilize an EDI system </li></ul><ul><li>Additional expenses to convince suppliers and customers to use the electronic system </li></ul><ul><li>Loss of float </li></ul><ul><li>Benefits </li></ul><ul><li>Information and payments move faster and with greater reliability </li></ul><ul><li>Improved cash forecasting and cash management </li></ul><ul><li>Customers receive faster and more reliable service </li></ul><ul><li>Reduction in mail, paper, and document storage costs </li></ul>Costs and Benefits of EDI
  41. 41. <ul><li>Reducing and controlling operating costs </li></ul><ul><li>Improve company focus (close 2 nd ) </li></ul><ul><li>Freeing resources for other purposes * The Outsourcing Institute, 2005 </li></ul>Outsourcing – Subcontracting a certain business operation to an outside firm, instead of doing it “in-house.” Why might a firm outsource?* Outsourcing
  42. 42. <ul><li>Business Process Outsourcing (BPO) </li></ul><ul><li>A form of outsourcing in which the entire business process is handed over to a third-party service provider </li></ul><ul><li>Entire function such as accounting might be handed over to the BPO </li></ul><ul><li>Typically found in low labor cost countries </li></ul><ul><li>Many are owned by large multinationals </li></ul>Outsourcing
  43. 43. <ul><li>The optimal level of cash should be the larger of: </li></ul><ul><ul><li>(1) The transaction balances required when cash management is efficient. </li></ul></ul><ul><ul><li>(2) The compensating balance requirements of commercial banks. </li></ul></ul>Cash Balances to Maintain
  44. 44. <ul><li>Note regarding the management of marketable securities. </li></ul><ul><li>Marketable Securities are shown on the balance sheet as “Short-term Investments” </li></ul>Investment in Marketable Securities
  45. 45. <ul><li>Ready Cash Segment (R$) </li></ul><ul><li>Optimal balance of marketable securities held to take care of probable deficiencies in the firm’s cash account. </li></ul>R$ F$ C$ The Marketable Securities Portfolio
  46. 46. <ul><li>Controllable Cash Segment (C$) </li></ul><ul><li>Marketable securities held for meeting controllable (knowable) outflows, such as taxes and dividends. </li></ul>R$ F$ C$ The Marketable Securities Portfolio
  47. 47. <ul><li>Free Cash Segment (F$) </li></ul><ul><li>“ Free” marketable securities (that is, available for as yet unassigned purposes). </li></ul>R$ F$ C$ The Marketable Securities Portfolio
  48. 48. <ul><li>Marketability (or Liquidity) </li></ul><ul><ul><li>The ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession. </li></ul></ul><ul><li>Safety </li></ul><ul><ul><li>Refers to the likelihood of getting back the same number of dollars you originally invested (principal). </li></ul></ul>Variables in Marketable Securities Selection
  49. 49. <ul><li>Maturity </li></ul><ul><li>Refers to the remaining life of the security. </li></ul><ul><li>Interest Rate (or Yield) Risk </li></ul><ul><ul><li>The variability in the market price of a security caused by changes in interest rates. </li></ul></ul>Variables in Marketable Securities Selection
  50. 50. <ul><li>Treasury Bills (T-bills) : Short-term, non-interest bearing obligations of the US Treasury issued at a discount and redeemed at maturity for full face value. Minimum $100 amount and $100 increments thereafter. </li></ul><ul><li>Money Market Instruments </li></ul><ul><ul><li>All government securities and short-term corporate obligations. (Broadly defined) </li></ul></ul>Common Money Market Instruments
  51. 51. <ul><li>BEY = [ ( 1000 – 990 ) / ( 990 ) ] *[ 365 / 91 ] </li></ul><ul><li>BEY = 4.05% </li></ul>T-Bills and Bond Equivalent Yield (BEY) Method: <ul><li>BEY = [ ( FA – PP ) / ( PP ) ] *[ 365 / DM ] </li></ul><ul><ul><ul><li>FA: face amount of security </li></ul></ul></ul><ul><ul><ul><li>PP : purchase price of security </li></ul></ul></ul><ul><ul><ul><li>DM: days to maturity of security </li></ul></ul></ul><ul><ul><ul><li>A $1,000 , 13-week T-bill is purchased for $ 990 – what is its BEY ? </li></ul></ul></ul>
  52. 52. <ul><li>EAY = (1 + [ .0405 /(365 / 91) ]) 365/ 91 - 1 </li></ul><ul><li>EAY = 4.11% </li></ul>T-Bills and Equivalent Annual Yield (EAY) Method: <ul><li>EAY = (1 + [ BEY / (365 / DM) ] ) 365/ DM - 1 </li></ul><ul><ul><ul><li>BEY: bond equivalent yield from the previous slide </li></ul></ul></ul><ul><ul><ul><li>DM: days to maturity of security </li></ul></ul></ul><ul><ul><ul><li>Calculate the EAY of the $1,000 , 13-week T-bill purchased for $990 described on the previous slide? </li></ul></ul></ul>
  53. 53. <ul><li>Treasury Bonds : Long-term (more than 10 years’ original maturity) obligations of the US Treasury. </li></ul><ul><li>Treasury Notes : Medium-term (2-10 years’ original maturity) obligations of the US Treasury. </li></ul>Common Money Market Instruments
  54. 54. <ul><li>Bankers’ Acceptances (BAs) : Short-term promissory trade notes for which a bank (by having “accepted” them) promises to pay the holder the face amount at maturity. </li></ul><ul><li>Repurchase Agreements (RPs; repos) : Agreements to buy securities (usually Treasury bills) and resell them at a higher price at a later date. </li></ul>Common Money Market Instruments
  55. 55. <ul><li>European Commercial Paper : See above, except maturities extend to one year and more active secondary market. </li></ul><ul><li>Commercial Paper : Short-term, unsecured promissory notes, generally issued by large corporations (unsecured IOUs). The largest dollar-volume instrument in US. Maturities don’t exceed 270 days to preclude SEC registration. </li></ul>Common Money Market Instruments
  56. 56. <ul><li>Federal Agency Securities : Debt securities issued by federal agencies and government-sponsored enterprises (GSEs). Examples: FFCB, FNMA, and FHLMC. </li></ul><ul><li>Negotiable Certificate of Deposit : A large-denomination investment in a negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified period of time. </li></ul>Common Money Market Instruments
  57. 57. <ul><li>Money Market Preferred Stock : Preferred stock having a dividend rate that is reset at auction every 49 days. </li></ul><ul><li>Eurodollars : A US dollar-denominated deposit – generally in a bank located outside the United States – not subject to US banking regulations </li></ul>Common Money Market Instruments
  58. 58. <ul><li>Ready Cash Segment (R$) </li></ul><ul><li>Safety and ability to convert to cash is most important. </li></ul><ul><li>Select US Treasuries for this segment. </li></ul>R$ F$ C$ Selecting Securities for the Portfolio Segments
  59. 59. <ul><li>Controllable Cash Segment (C$) </li></ul><ul><li>Marketability less important. Possibly match time needs. </li></ul><ul><li>May select CDs, repos, BAs, euros for this segment. </li></ul>R$ F$ C$ Selecting Securities for the Portfolio Segments
  60. 60. <ul><li>Free Cash Segment (F$) </li></ul><ul><li>Base choice on yield subject to risk-return trade-offs. </li></ul><ul><li>Any money market instrument may be selected for this segment. </li></ul>R$ F$ C$ Selecting Securities for the Portfolio Segments
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