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Holding period for securities

(Buying and selling marketable securities) Pearl Islands Tour Operator, located in the Pacific Ocean near Panama City, has effectively collected
$1,500,000 in excess cash that it plans to invest in marketable securities. The firm will have to pay total transaction costs of $30,000 to buy and sell the securities.

A) Would you recommend purchasing the securities if they yield 8.25 percent annually and are held for

1. One month?
2. Two months?
3. Three months?
4. Six months?
5. One year?

B) What minimum required yield would the securities have to return for the firm to hold them for 3 months? ( What is the break-even yield for a
3-month holding period?)

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Solution Preview

A. The firm incurs 30,000 to buy the securities. The interest from the securities should be moe than 30,000 to purchase them.
1. The interest for 1 month is ...

Solution Summary

The solution explains how to determine the minimum holding period for securities.