Khalid A Yasin - Outlook

Managing in Financial Markets money Market Portfolio Dilemma As the treasurer of a , one of your jobs is to maintain invest in liquid securities such as Treasury securities and commercial paper, Your goal is to earn as high return as possible but without taking much of a risk.

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

b, Assume that you have substantially more cash than you would possibly need for any liquidity pro- blems. Your boss suggests that you consider investing the excess funds in some money market securities that have a higher return than short-term Treasury

c. Assume that commercial paper is currently of ing an annualized yield of 7.5 percent, while Treasury securities are offering an annualized yield of 7 percent Economic conditions have been stable, and you expect conditions to be very favorable over the next six months. Given this situation, would you prefer to hold T-bills or a diversified portfolio of commercial paper issued by various corporations? d. Assume that commercial paper typically offers a premium of 0.5 percent above the T-bill rate. Given that your firm typically maintains about $10 million in liquid funds, how much extra will you generate per year by investing in commercial paper versus T-bills Is this extra return worth the risk that the commercial paper could default?