Short-term investment returns: money market instruments

Part of your responsibilities as a junior financial analyst is researching and identifying potential shortterm liquid investment options for your firm. These investment vehicles are at times used by the firm

during periods when their cash inflows exceed projections. The firm, at times, uses excess cash to

purchase short-term debt instruments providing a low, but safe marginal return on invested capital.

Your Director, who reports to the firm's Chief Financial Officer (CFO) has come to you seeking your

recommendation on short-term investment options for the upcoming year. The Director has asked for

recommendations and a report illustrating your optimal analysis for investing $2.5m of excess cash.

Current background info: We have a potential impending compound money market problem: The U.S. is

issuing more debt, in part due to the recent tax cuts. Simultaneously, the Fed, China, Japan and to a

lesser degree Russia have been reducing their holdings of U.S. Debt. Therefore, if the U.S. Treasury

Department can't get entities to their positions holding U.S. debt, then the pressure to increase interest

rates to make newly issued securities attractive increases. Increased interest rates at the Treasury

means securities prices fall with cascading impacts.

Therefore, the current interest rate environment is one where rates are expected to increase.

Parameters for the research and analysis report are as follows:

1. Investments selections are primarily short term (one year or less), but will consider U.S. Treasury

Bills of shorter duration as well as TIPS.

2. A minimum of 3 short term debt money market security types are to be recommended. They

may include Federal money market bills, U.S. Savings Bonds, CDs, U.S. Treasury Notes, Treasury

Bills, and TIPS.

a. Note: money market investments of the range of two to five years are acceptable.

b. However, no more than 40% of the portfolio can be invested in a security of with

duration of greater than 12 months.

3. A recommendation on the optimal allocation of $2.5 m across the investment portfolio is

required.

4. Current (as of the date of this assignment) rates and investments are to be used.

The analysis report to be presented to the Director is to include:

1. Your concise statement and recommendation of the specific short-term investment options that

meets the firm's criteria.

Followed by:

2. A detailed summary of the investment asset and the parameters you will use in which to base

your recommendation.

3. A detailed description of the upside and downside risk of each investment. The latter is of

particular importance as the firm may decide to manage excess cash in one or more vehicles for

longer than one year.

4. Source identifier for all investment selections

a. Example: website URL

5. A spreadsheet (embedded into the report) illustrating the following:

a. Asset category/classification

b. Specific money market instrument identifier

i. Example: U.S. Treasury CUSIP

6. EAR for each investment

7. YTM for each investment

a. If held to maturity

b. If sold at the end of 12 months

8. Total return for investment portfolio if held to maturity