ACCA Applied Skills · Financial Management · The nature and role of money markets
A company expects a temporary cash surplus of $2 million for three months and wants a marketable, low-risk, short-term investment that can be sold before maturity if cash is needed earlier. Which instrument is most suitable?
A negotiable certificate of deposit is most suitable because it is a short-term, low-risk bank instrument that can be sold in the secondary market before maturity. Equities and long-dated bonds have price risk over three months, and a loan to a supplier cannot be easily sold.
- AOrdinary shares in a listed company
- BA ten-year corporate bond
- CA negotiable certificate of depositCorrect
- DA fixed-term bank loan to a supplier
Explanation
A negotiable certificate of deposit is a short-term, low-risk instrument issued by a bank which can be sold in the secondary market before maturity. Shares and ten-year bonds carry price risk over a three-month horizon, and a loan to a supplier is not marketable.
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