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CMA Intermediate · Financial Management and Business Data Analytics · Management of Cash and Cash Equivalents

A treasury analyst at Bharat Foods Ltd. ranks short-term investment options only on safety and liquidity, ignoring yield. Which ordering from most to least preferred is consistent with this criterion?

The ordering is Treasury bill, then bank certificate of deposit, then corporate commercial paper. Treasury bills have sovereign backing and deep liquidity, certificates of deposit carry bank credit risk, and commercial paper is unsecured corporate debt with the highest credit risk and thinnest liquidity.

  1. ATreasury bill, bank certificate of deposit, corporate commercial paperCorrect
  2. BCorporate commercial paper, bank certificate of deposit, Treasury bill
  3. CBank certificate of deposit, corporate commercial paper, Treasury bill
  4. DCorporate commercial paper, Treasury bill, bank certificate of deposit

Explanation

Treasury bills carry sovereign backing and have a deep secondary market, so they rank first. Bank certificates of deposit carry the credit risk of a regulated bank, which is generally lower than that of a corporate issuer. Commercial paper is unsecured corporate paper with the highest credit risk and least liquidity of the three, so it ranks last.

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