Prepared by Daniyal

Maqsood

CASH &
MARKETABLE
SECURITIES

CASH & MARKETABLE

SECURITIES

TOPICS for Presentation

Cash Balances To Maintain.

Investment In Marketable
Securities.

Common Money Market

Instruments

CASH BALANCES TO
MAINTAIN

CASH BALANCES TO
MAINTAIN

The optimal level of cash should

be the larger of:
(1) The transaction balances required when
cash management is efficient.
(2) The compensating balance requirements
of commercial banks.

CASH BALANCES TO
MAINTAIN
Transaction Balance
Cash held to cover day-to-day
transactions.
Compensating Balance
Non-interest-bearing demand deposits
maintained by a firm to compensate a
bank for services provided, credit
lines, or loans.

CASH BALANCES TO
MAINTAIN

COMPENSATING BALANCES & FEES:-

The requirements for the firm to maintain a certain

amount of demand deposits to compensate a bank for
services provided are based on the profitability of the
account.
Bank differ in the method of account analysis they use,
the determination of compensating balances varies.
The firm therefore find the bank that requires the lowest
compensating balances for a given level of activity.
In recent years, a marked trend toward paying cash for
services rendered by a bank instead of maintaining
compensating balances.
The advantage to the firm is that it may be able to earn
more on funds used for compensating balances than the

INVESTMENT IN
MARKETABLE
SECURITIES

INVESTMENT IN
MARKETABLE
Marketable SECURITIES
Securities are shown on
the balance sheet as:
1. Cash equivalents if maturities are
less than three (3) months at the
time of acquisition.
2. Short-term investments if
remaining maturities are less
than one (1) year.

THE MARKETABLE
SECURITIES PORTFOLIO

Ready Cash
Segment (R$)

F$
R$
C$

Optimal balance of
marketable
securities held to
take care of
probable
deficiencies in the
firms cash account.

THE MARKETABLE
SECURITIES PORTFOLIO
Controllable Cash
Segment (C$)

F$
R$
C$

Marketable
securities held for
meeting
controllable
(knowable)
outflows, such as
taxes and

THE MARKETABLE
SECURITIES PORTFOLIO
Free Cash Segment
(F$)

F$
R$
C$

Free marketable
securities (that is,
available for as yet
unassigned
purposes).

VARIABLES IN
MARKETABLE
SECURITIES
SECTION

VARIABLES IN
MARKETABLE
SECURITIES
Safety
Refers to the likelihood of getting back
the same number of dollars you originally
invested (principal).
Marketability (or Liquidity)
The ability to sell a significant volume of
securities in a short period of time in the
secondary market without significant
price concession.

VARIABLES IN
MARKETABLE
Interest SECURITIES
Rate (or Yield) Risk
The variability in the market price
of a security caused by changes in
interest rates.
Maturity
Refers to the remaining life of the
security.

COMMON MONEY
MARKET
INSTRUMENTS

COMMON MONEY
MARKET INSTRUMENT
Money Market Instruments
All government securities and short-term
corporate obligations. (Broadly defined)

Treasury Bills (T-bills): Short-term,

non-interest bearing obligations of the
U.S. Treasury issued at a discount and
redeemed at maturity for full face
value. Minimum $1,000 amount and
$1,000 increments thereafter.

COMMON MONEY
MARKET INSTRUMENT

Treasury Notes: Medium-term

(2-10 years original maturity)
obligations of the U.S. Treasury.

Treasury Bonds: Long-term (more

than 10 years original maturity)
obligations of the U.S. Treasury.

COMMON MONEY
MARKET INSTRUMENT

Repurchase Agreements (RPs;

repos): Agreements to buy
securities (usually Treasury bills)
and resell them at a higher price at
a
later date.
Bankers
Acceptances (BAs): Shortterm promissory trade notes for
which a bank (by having
accepted them) promises to pay
the holder the face amount at
maturity.
Prepared by DANIYAL MAQSOOD

COMMON MONEY
MARKET INSTRUMENT

Commercial Paper: Short-term,

unsecured promissory notes, generally
issued by large corporations (unsecured
IOUs). The largest dollar-volume
instrument.
Federal Agency Securities: Debt
securities issued by federal agencies
and government-sponsored enterprises
(GSEs). Examples: FFCB, FNMA, and
FHLMC.

COMMON MONEY
MARKET INSTRUMENT

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.

COMMON MONEY
MARKET INSTRUMENT

Eurodollars: A U.S. dollardenominated deposit -- generally in

a bank located outside the United
States -- not subject to U.S. banking
regulations
Money Market Preferred Stock:
Preferred stock having a dividend
rate that is reset at auction every
49 days.
Prepared by Daniyal
Maqsood

Prepared by Daniyal
Maqsood