©2012 McGraw-Hill Ryerson Limited1 of 39 ©2012 McGraw-Hill Ryerson Limited

3. Define the various marketable securities available for investment by the firm and calculate the yield on these instruments. (LO3)

4. Characterize accounts receivable as an investment resulting from the firm’s credit policies, outline the considerations in granting credit, and evaluate a credit decision that changes credit terms to stimulate sales. (LO4)

Learning Objectives

©2012 McGraw-Hill Ryerson Limited2 of 39

Marketable Securities• Excess cash should be invested in short-term securities

(marketable securities).• Factors to consider in choosing these securities:

yieldmaturityminimum investment requiredsafetymarketability

• Yield (return) on marketable securities:100 365P

rP d

LO3

©2012 McGraw-Hill Ryerson Limited3 of 39

Figure 7-2An examination ofyield and maturitycharacteristics

LO3

©2012 McGraw-Hill Ryerson Limited4 of 39 ©2012 McGraw-Hill Ryerson Limited

Table 7-3Hierarchy of money market instruments and rates

LO3

Investment Maturity*Minimum Amount Safety Marketability

Yield Mar. 22, 1990‡

Yield Apr. 29,

2011

Prime rate (best corporate customers) 14.25 3.00

Bank rate (Bank of Canada’s rate to banks, dealers) 13.38 1.25

Treasury bills 6 m. $1,000 Excellent Excellent 13.25 1.08

LIBOR (London Interbank Offered Rate)

3 m. 100,000 Good Excellent 12.94 0.27

Commercial (corporate) paper 3 m. 100,000 Good Fair 13.33 1.07

Bankers’ acceptances 3 m. 25,000 Good Good 13.27 1.12

Provincial government treasury bills 3 m. 25,000 Excellent Excellent 3.18 1.01

Federal government treasury billsъ 3 m. 1,000 Excellent Excellent 13.13 0.92

Overnight repo Day 100,000 Excellent Excellent -- 1.0008

Overnight financing rate (call money) Day 100,000 Excellent Excellent -- .9972

Money market deposits Open 500 Excellent None 10.15 1.00

Term deposits and GICs 90 5,000 Good None† 12.75 0.50

Savings accounts Open None Excellent None† 8.75 0.00-1.25

* Many of these securities can be purchased with different maturities than those indicated. † Though not marketable, these investments are highly liquid and can often be withdrawn without penalty.‡ Quoted yields are often for wholesale amounts above $1 millionъ In the summer of 1981, 3-month Treasury Bills offered yields in excess of 20%