Financial Management

OPTIMIZING CASH BALANCES

REPORTED BY: ARMANDO Y. VICENCIO, JR. PROF. ADALIA BRINGAS

Objectives
1. EXPLAIN THE THREE (3) SEGMENTS OF MARKETABLE SECURITIES PORTFOLIO TO OPTIMIZE CASH BALANCES. 2. EXPLAIN THE VARIABLES IN MARKETABLE SECURITIES SELECTION. 3. EXPLORE COMMON MARKET INSTRUMENTS. 4. EXPLAIN HOW TO SELECT MARKETABLE SECURITIES FOR OUR PORTFOLIO SEGMENTS AS A MEANS OF PORTFOLIO MANAGEMENT.

Cash Balances to Maintain

The optimal level of cash should be larger of;
The

transactions balances required.

The

compensating balance requirements of commercial banks with which the firm has deposit accounts.

Compensating Balances VS Fees

Compensating balance

An excess balance that is left in a bank to provide indirect compensation for loans extended or services provided.

Bank Fees Nominal fees for various services, such as requesting a deposit slip or counter check or notarizing a document. Bank fees generally constitute a major portion of revenue for the bank, particularly for regional and local branches.

Investment in Marketable Securities

Short-term marketable securities

Shown on the balance sheet as "short-term

investments."

The Marketable Securities Portfolio: Three Segments

The Marketable Securities Portfolio: Three Segments

The Marketable Securities Portfolio: Three Segments

The Marketable Securities Portfolio: Three Segments

Variables in Marketable Securities Selection

Safety

Marketability
Yield Maturity

Variables in Marketable Securities Selection

Safety

No likelihood of loss in value. Safety of Principal

Liquidity Relates to the owner's ability to convert it into cash on short notice. Return is related to the interest and/or appreciation of principal provided by the security Simply refers to the life of the security.

Marketability

Yield

Maturity

Common Money Market Instruments

Money market instruments

These

instruments are generally short-term (original maturity of less than one year) investments.

Near-cash

Common Money Market Instruments

Treasury Securities

Repurchase Agreements
Bankers' acceptances (BAs) Commercial Paper

Negotiable Certificates of Deposit

Eurodollars Short-Term Municipals

Money Market Preferred Stock

Money Market Mutual Funds

Common Money Market Instruments

Treasury Securities
Direct

obligations of the government and carry its full faith and credit. Treasury bills (T-bills) with maturities of 4,13, 26, and 52 weeks are auctioned weekly by the Treasury. Safest and most marketable money market investments. Provide the lowest yield for a given maturity

Common Money Market Instruments

Repurchase Agreements (RPs; repos)
Is

the sale of short-term securities by the dealer to the investor whereby the dealer agrees to repurchase the securities at an established higher price at a specified future time.

Common Money Market Instruments

Bankers' acceptances (BAs) Short-term promissory notes

Drawn on a bank by a firm to help finance foreign and domestic trade. By "accepting" the draft, a bank promises to pay the holder of the draft a stated amount of money at maturity. The drawer of the draft remains secondarily liable to the holder in case the bank defaults. Credit Investment

Common Money Market Instruments

Commercial Paper
Consists

of short-term, unsecured promissory notes issued by finance companies and certain industrial firms. General Electric Capital Corporation Ford Motor Credit Company General Motors Acceptance Corporation (GMAC),

Common Money Market Instruments

Negotiable Certificates of Deposit

A short-term investment that originated in 1961, the negotiable certificate of deposit (CD) is a large-denomination, negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified time. Eurodollar CDs, Yankee CDs & Thrift CDs

Common Money Market Instruments

Eurodollars
Bank

deposits, denominated in US dollars, not subject to US bank regulations. to any dollar deposit in foreign banks or in foreign branches of US banks.

Applies

Common Money Market Instruments

Short-Term Municipals
Local

Governments

One

is a commercial paper type of instrument, where the interest rate is reset every week. is usually kept within one or two

Maturity

years.

Common Money Market Instruments

Money Market Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares".

Common Money Market Instruments

Mutual Funds
Fund

operated by an investment company which raises money from shareholders and invests in a group of assets
funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public.

Mutual

Common Money Market Instruments

Mutual Funds
Mutual

funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time.

Selecting Securities for the Portfolio Segments

Selecting Securities for the Portfolio Segments

Ready cash segment (R$)
Major

Considerations

Safety

and Marketability Maturity: Short-term

Money

Market Securities

Treasury

Bills Short-term, high-quality repurchase agreements Short-term Municipals

Selecting Securities for the Portfolio Segments

Cash segment (C$)
Major Considerations
Yield Safety

and Marketability

Money

Market Securities

Federal

Agency Issues Certificate of Deposits (Timed Deposits) Commercial Paper Repurchase Agreements Bankers Acceptances Eurodollar Deposits Mutual Funds

Selecting Securities for the Portfolio Segments

Free cash segment (F$)
Major
Yield Maturity:

Considerations
Long-term

Money
Stocks

Market Securities
of Deposits (Timed Deposits) Funds

Certificate Mutual

Thank You