f. Eurodollars 1 2 3 4 5 6 7 Evaluate the yield-risk trade-off for each instrument. Consider the appropriateness of each of these securities for the corporation's short-term investment account.

m

,-rip6 Solutions to S e l

f- correction Problems 1.

(31

(11 (21 Expected Cost Level of Probabilify of Bankruptcy (4)

Liquidity of Bankruptcy (2) X $100,000 Change in (3)

$ 25,000 .30 $30,000 -

50,000 .20 20,000 -$lO,OOO 75,000 .15 15,000 -5,000 100,000 .I2 12,000 -3,000 125,000 .10 10,000 -2,000 150,000 .08 8,000 -2,000 175,000 .06 6,000 -2,000 200,000 .05 5,000 -1,000 225,000 .04 4,000 - 1,000 250,000 .03 3,000 -1,000 446 Part V L i q u i d i t y and Working Capital Management As the marginal present-value cost of each $25,000 increment of liquidity is

$1,500, the optimal level of liquidity is $175,000. At this level, there is a 6 percent chance that bankruptcy will occur.