Reference no: EM132684625

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 a high return as possible but without taking much of a risk.

Questions:

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

Problem b. Assume that you have substantially more cash than you would possibly need for any liquidity problems. Your boss suggests that you should 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?

Problem c. Assume that commercial paper is currently offering an annualized yield of 7.5%, while Treasury securities are offering an annualized yield of 7 %. Economic conditions have been stable, and you expect conditions to be very favorable over the next six (6) months. Given this situation, would you prefer to hold T-bills or a diversified portfolio of commercial paper issued by various corporations?