7-1.Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must be available when needed, the primary concern should be with safety and liquidity rather than the maximum profits.
7-2.Liquidity is the quality of converting an asset to cash quickly and at fair market value.
7-3.The treasury manager is most concerned with daily cash flows of a corporation as it is the manager’s responsibility to invest temporary funds into money market instruments and to provide for temporarily excess funds into money market instruments and to provide for temporary cash needs through borrowing. Income based on accrual accounting methods will not capture daily cash surpluses and deficits.
7-4.Float represents the difference between a corporation's recorded cash balances and the amount credited to the corporation by the bank. It is the latter item that is of particular interest to us. To the extent a corporation can accelerate check collections to the bank account and slow down check payments from its bank account, the cash balance at the bank may exceed the recorded amount on the company books. The differential or float may be thought of as a short-term source of funds to the corporation.
7-5.Float exists because of the delay time in cheque processing. Electronic funds transfer, or the electronic movement of funds between computer terminals, would eliminate the need for cheques and thus eliminate float.
7-6.A firm could operate with a negative balance on the corporate books, as indicated in Table 7-2, knowing float will carry them through at the bank. Cheques written on the corporate books may not clear until many days later at the bank. For this reason, a negative account balance on the corporate books of $100,000 may still represent a positive balance at the bank.
7-7.Both lockbox systems and regional collection offices allow for the rapid processing of checks that originate at distant points. The difference is that a regional collection center requires the commitment of corporate resources and personnel to staff an office, while a lockbox system requires only the use of a post office box and the assistance of a local bank. Clearly, the lockbox system is less expensive.
7-8.By slowing down disbursements or the processing of checks against the corporate account, the firm is able to increase float and also to provide a source of short-term financing.
7-9.The answer to this question may well depend upon the phase of the business cycle at the time the question is considered. In normal times, small CDs and savings accounts may prove adequate. However, in a tight money period, wide differentials may be established between the various instruments and maximum returns may be found in Treasury bills, large CDs, commercial paper, and money market funds.
7-10.Treasury bills are popular because of the large and active market in which they trade. Because of this, the investor may literally pinpoint the maturity desired -- choosing anywhere from one day to a year. The "T-bill" market provides maximum liquidity and can absorb almost any dollar amount of business.
7-11.U.S. money market rates until the mid 90s had been lower than Canadian rates on similar risk instruments, due to the underlying inflationary rate being lower in the United States and due to the monetary policy of the U.S. central bank being somewhat less restrictive. These factors reversed by the 90s allowing Canadian rates to dip significantly below U.S. rates.
7-12.The money market is a communications network where trades in short-term financial obligations occur. Canada’s money market is centered in Toronto. The Eurobond market is for financial obligations with longer maturities and exists where the currency of the bond is not in its home jurisdiction. Although centered in London the euromarkets are around the globe....