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CFA Level I · CFA Level I Exam · Working Capital and Liquidity

A corporate treasurer is setting the objectives of the firm's short-term investment policy for surplus cash. Which objective should most likely take priority when choosing among short-term instruments?

Safety of principal and liquidity should take priority. Short-term surplus cash is held to meet near-term obligations, so preserving capital and being able to convert to cash quickly matter more than extra yield, which usually requires accepting more credit or liquidity risk.

  1. ASafety of principal and liquidityCorrect
  2. BMaximizing the yield on the portfolio
  3. CMatching maturities to long-term project cash flows

Explanation

A short-term investment policy exists to keep cash available for operating needs. Safety of principal and liquidity therefore come before yield. Maximizing yield would push the firm toward riskier or less liquid instruments, which conflicts with the purpose of the surplus cash.

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