Asked by DANTE ANDERSON on Jul 27, 2024
Verified
A firm has excess idle cash due to seasonal fluctuations in cash flow. Management is considering investing the funds in five-year corporate bonds issued by a local firm. What are the pros and cons of this strategy?
Seasonal Fluctuations
Variations in sales, inventory levels, or business activity that regularly occur at certain times of the year due to seasons.
Corporate Bonds
Debt securities issued by corporations to fund capital improvements, expansions, or other business needs.
Idle Cash
Cash that is not currently invested or used in transactions, often earning minimal or no interest.
- Comprehend the array of financial instruments and strategies, such as smart cards, dividend capture strategies, lockboxes, and evaluating corporate bonds as an option for investing surplus dormant cash.
Verified Answer
MW
Michael WilliamsJul 29, 2024
Final Answer :
This choice violates most of what is considered desirable about marketable securities. First, the maturity is relatively long, raising questions about interest-rate risk. Second, no information is given about default risk, but it is a factor in corporate bond investing and the firm should consider this in its analysis. Third, marketability is a concern. We don't know the size of the firm, but corporate bonds in general are relatively illiquid, making them a poor choice for parking excess cash.
Learning Objectives
- Comprehend the array of financial instruments and strategies, such as smart cards, dividend capture strategies, lockboxes, and evaluating corporate bonds as an option for investing surplus dormant cash.