optimizing cash balances
TRANSCRIPT
OPTIMIZING CASH BALANCES
REPORTED BY: ARMANDO Y. VICENCIO, JR.
PROF. ADALIA BRINGAS
Financial Management
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.
Objectives
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
SafetyMarketabilityYieldMaturity
Variables in Marketable Securities Selection
Safety No likelihood of loss in value. Safety of Principal
Marketability Liquidity Relates to the owner's ability to convert it into cash on
short notice. Yield
Return is related to the interest and/or appreciation of prin cipal
provided by the securityMaturity
Simply refers to the life of the security.
Common Money Market Instruments
Money market instruments These instruments are generally short-
term (original maturity of less than one year)
Near-cash investments.
Common Money Market Instruments
Treasury SecuritiesRepurchase AgreementsBankers' acceptances (BAs) Commercial PaperNegotiable Certificates of DepositEurodollarsShort-Term MunicipalsMoney Market Preferred StockMoney 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.
Pro vide 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 promis sory notes
Drawn on a bank by a firm to help finance foreign and domestic trade.
By "accept ing" 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 Corpora tion
(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.
Applies to any dollar deposit in foreign banks or in foreign branches of US banks.
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.
Maturity is usually kept within one or two 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
Mutual 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.
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 Considerations Yield Maturity: Long-term
Money Market Securities Certificate of Deposits (Timed Deposits) Stocks Mutual Funds
Thank You…