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Yields on marketable securities; trade credit discounts

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1. Your firm invests in only three different classes of marketable securities: commercial paper, Treasury bills, and federal agency securities. Recently, yields on these money market instruments of three months' maturity were quoted at 6.10, 6.25, and 5.90 percent. Match the available yields with the types of instruments your firm purchases.

2. (Trade credit discounts) Determine the effective annualized cost of forgoing the trade credit discount on the following terms:
a. 1/10, net 20
b. 2/10, net 30
c. 3/10, net 30
d. 3/10, net 60
e. 3/10, net 90
f. 5/10, net 60

3. (EOQ calculations) The local hamburger fast-food restaurant purchases 20,000 boxes of hamburger rolls every month. Order costs are \$50 an order, and it costs 25 cents a box for storage.
a. What is the optimal order quantity of hamburger rolls for this restaurant?
b. What questionable assumptions are being made by the EOQ model?

4. (EOQ calculations) A local car manufacturing plant has a \$75 per-unit per-year carrying cost on a certain item in inventory. This item is used at a rate of 50,000 per year. Ordering costs are \$500 per order.
a. What is the EOQ for this item?
b. What are the annual inventory costs for this firm if it orders in this quantity? (Assume constant demand and instantaneous delivery.)

Solution Preview

1. Your firm invests in only three different classes of marketable securities: commercial paper, Treasury bills, and federal agency securities. Recently, yields on these money market instruments of three months maturity were quoted at 6.10, 6.25, and 5.90 percent. Match the available yields with the types of instruments your firm purchases.
Commercial paper 6.25%
Treasury bills 5.90%
Federal Agency securities 6.10%

The criteria, for associating yields, is based on risk. The three different securities have different levels of risk. Treasury bills are backed by the trust of the federal govt and so do not have any default risk. Commercial bills, however, are issued by organisations and have potential for default. Investors require a premium as compensation for taking on risk. Commercial bills among the three has the highest risk ...

Solution Summary

The yields on marketable securities and trade credit discounts are examined.

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