MBA 6400 Case Study: Case Excess Cash and Short Term Investments

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Economics

MBA 6400

Oxford University

MBA

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MBA 6400 Case Study #1 Short-term investment returns: money market instruments Part of your responsibilities as a junior financial analyst is researching and identifying potential shortterm liquid investment options for your firm. These investment vehicles are at times used by the firm during periods when their cash inflows exceed projections. The firm, at times, uses excess cash to purchase short-term debt instruments providing a low, but safe marginal return on invested capital. Your Director, who reports to the firm’s Chief Financial Officer (CFO) has come to you seeking your recommendation on short-term investment options for the upcoming year. The Director has asked for recommendations and a report illustrating your optimal analysis for investing $2.5m of excess cash. Current background info: We have a potential impending compound money market problem: The U.S. is issuing more debt, in part due to the recent tax cuts. Simultaneously, the Fed, China, Japan and to a lesser degree Russia have been reducing their holdings of U.S. Debt. Therefore, if the U.S. Treasury Department can’t get entities to their positions holding U.S. debt, then the pressure to increase interest rates to make newly issued securities attractive increases. Increased interest rates at the Treasury means securities prices fall with cascading impacts. Therefore, the current interest rate environment is one where rates are expected to increase. Parameters for the research and analysis report are as follows: 1. Investments selections are primarily short term (one year or less), but will consider U.S. Treasury Bills of shorter duration as well as TIPS. 2. A minimum of 3 short term debt money market security types are to be recommended. They may include Federal money market bills, U.S. Savings Bonds, CDs, U.S. Treasury Notes, Treasury Bills, and TIPS. a. Note: money market investments of the range of two to five years are acceptable. b. However, no more than 40% of the portfolio can be invested in a security of with duration of greater than 12 months. 3. A recommendation on the optimal allocation of $2.5 m across the investment portfolio is required. 4. Current (as of the date of this assignment) rates and investments are to be used. The analysis report to be presented to the Director is to include: 1. Your concise statement and recommendation of the specific short-term investment options that meets the firm’s criteria. Followed by: 2. A detailed summary of the investment asset and the parameters you will use in which to base your recommendation. 3. A detailed description of the upside and downside risk of each investment. The latter is of particular importance as the firm may decide to manage excess cash in one or more vehicles for longer than one year. 4. Source identifier for all investment selections 5. 6. 7. 8. 9. a. Example: website URL A spreadsheet (embedded into the report) illustrating the following: a. Asset category/classification b. Specific money market instrument identifier i. Example: U.S. Treasury CUSIP EAR for each investment YTM for each investment a. If held to maturity b. If sold at the end of 12 months Total return for investment portfolio if held to maturity Spreadsheet model is to include all cell-based formulas for all calculations Your conclusion is to summarize the recommendation made in item #1 above Format for report. Your report must: 1. 2. 3. 4. Be presented in Word file format Analysis must be between 3 to 5 pages maximum, including spreadsheet analysis Excel spreadsheet is embedded into the Word file Submit Excel file separately
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Six-month Treasury Bill
% of Portfolio Invested

45%

Face Value of Bond (FV)

$

1,139,010

Price

$

2.4

Yield
Asset Category
Asset Classification
Issue Date
Maturity Date
Money Market Instrument Identifier
Effective Annual Interest Rate (EAR)
Yield to Maturity (YTM) if held to maturity

$

11,390

2.46%
U.S. Treasury and U.S. Agency Securities
Cash Equivalent
9/30/2019
3/30/2020
U.S. Treasury CUSIP
912796SB6
2.49%
1.25%

Current Price of Bond (PV)

$

Total Return for Investment portfolio

$

448.95
1.23
98.77
1,125,000
14,010

3-month Treasury Bill
% of Portfolio Invested
Face Value of Bond (FV)
Price
Yield
Asset Category
Asset Classification
Issue Date
Maturity Date
Length of Note
Issue Date
Money Market Instrument Identifier
EAR
YTM if held to maturity

20%
$
502,997
$
2.34
2.39%
U.S. Treasury and U.S. Agency Secu
Cash Equivalent
9/30/2019
12/31/2019
3 months (13 weeks)
1/31/2019
U.S. Treasury CUSIP
9.59%
1.20%

Current Price of Bond (PV)

$

Total Return for Investment portfolio

$

217.49
0.595863014
99.40413699
500,000
2,997

$

5,030

ury and U.S. Agency Securities

91 days
912796RJ0

Five-Year Treasury Inflation Protected Security
% of Portfolio Invested
Face Value of Bond (FV)
Yield
Coupon
Asset Category
Asset Classification
Issue Date
Maturity Date
Length of Note
Money Market Instrument Identifier
Years to Maturity
EAR
YTM if held to maturity
YTM if sold after 12 months

Current Price of Bond (PV)

$

Total Return for Investment portfolio

$

1194.72
3.273205479
96.72679452
875,000
29,610

ted Security
35%
$
904,610 $ 9,046
0.76%
0.63%
U.S. Treasury and U.S. Agency Securities
Cash Equivalent
12/31/2018
4/15/2023
4 years 4 months
1572 days
U.S. Treasury CUSIP 9128284H0
4.3
0.18%
1.41%
4.04%

REFERENCES
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