Presentation Title

iNVESTMENT IN
MARKETABLE
SECURITIES
1
 Presented by

Khansa Tallat
1437-FMS/BBAIt/S20

2
What are Marketable
Securities?

3
“Marketable securities are liquid financial instruments that can be quickly
converted into cash at a reasonable price within one year.”

❏ They are highly liquid investments that are generally issued by businesses to
raise funds for operating expenses or expansion. When a business invests in
marketable securities, it is usually to generate short-term earnings from excess
cash.
❏ In general, firms try to maintain some target level of cash to meet their needs for
transactions and/or compensating balances requirements.
❏ But beyond that we often find firms investing in short-term marketable securities
as a near-cash investment.
4
 Characteristics of Marketable Securities

Marketable securities have the following characteristics:

❏ Be available for purchase and sale on public exchanges.

❏ Be expected to be converted into cash within one year.
❏ Have a maturity date of one year or less.
❏ Have a strong secondary market that allows for timely transactions at fair
market price.

5
 The marketable securities portfolio: Three segments

❏ READY cash segment (R$):

Optimal balance of marketable securities held to take care of probable deficiencies in the firm’s
cash account. In this segment, a major requirement is instant liquidity. Because these securities
are intended to provide the first line of defense against unforeseen operating needs of the firm,
these securities may have to be liquidated on very short notice.
❏ Controllable cash segment (C$):
Marketable securities held for meeting controllable (knowable) outflows, such as taxes and
dividends.
❏ Free cash segment (F$):
“Free” marketable securities (i.e., available for as yet unassigned purposes). It is extra cash that
the firm has simply invested short term. Because the firm has no immediate use for these funds,
it is better to keep these funds invested than to have them lie idle in the cash account.

6
WHAT IS MONEY MARKET
INSTRUMENTS?

7
“Money market instruments are generally short-term (original maturity
of less than one year), high-quality government and corporate debt
issues.”
In Money market funds are borrowed for a short period of time.
OR
“Money market instruments are securities that provide businesses,
banks, and the government with large amounts of low-cost capital for
a short time.”

8
Common money market
instruments

9
❏ Treasury bills (T-bills) :
Treasury bills, also known as T-bills, it represent the short term borrowings
of central government form general public to reduce the overall fiscal
deficit of the country. It is known to be one of the safest money market
instrument available. Besides, they carry zero risk, so the returns are not
attractive. The central government issues them at a lesser price than their
face-value.
❏ Treasury notes :
Medium-term (2–10 years’ original maturity) obligations of the US
Treasury.
10
❏ Treasury Bonds :
Long-term (more than 10 years’ original maturity) obligations of the US
Treasury.
❏ Bankers’ Acceptances (BAs) :
Short-term promissory trade notes for which a bank (by having “accepted”
them) promises to pay the holder the face amount at maturity. This works
like a bank loan for international trade.The bank guarantees that one of its
customers will pay for goods received, typically 30-60 days later. For
example, an importer wants to order goods, but the exporter won't give

11
him credit. He goes to his bank which guarantees the payment. The bank
is accepting the responsibility for the payment.
❏ Repurchase agreements (RPs; repos) :
Agreements to buy securities (usually Treasury bills) and to resell them at
a specified higher price at a later date. A repo is when a bank issues
securities but promises at the same time to repurchase them later at a
higher price. This often means the next day with a little added interest.
❏ Commercial paper :
Short-term, unsecured promissory notes, generally issued by large
corporations (unsecured corporate IOUs) to raise cash.
12
❏ Negotiable certificate of deposit (CD) :
A large-denomination investment in a negotiable time deposit at a
commercial bank or savings institution paying a fixed or variable rate of
interest for a specified time period. It is a low-risk savings tool that can
boost the amount you earn in interest while keeping your money
invested in a relatively safe way.
❏ Eurodollars :
A US dollar-denominated deposit – generally in a bank located outside
the United States – not subject to US banking regulations.
❏ Money market preferred stock (MMP) :
Preferred stock having a dividend rate that is reset at auction every 49
days.
13
Selecting Securities for
the Portfolio Segments

14
The decision to invest cash in marketable securities involves not only the amount to
invest but also the type of security in which to invest. In selecting securities for the various
marketable securities portfolio segments (R$, C$, and F$), the portfolio manager tries to
match alternative money market instruments with the specific needs relating to each
segment, after taking into account such considerations as safety, marketability, yield, and
maturity. In short, the composition of the firm’s short-term marketable securities account
is determined while keeping in mind the trade-off that exists between risk and return.

❏ For securities constituting the firm’s ready cash segment (R$), safety and an
ability to convert quickly into cash are primary concerns. Because treasury bills
the safest and the most marketable of all money market instruments, Treasury bills
make an ideal choice to meet the firm’s unexpected needs for ready cash.

15
❏ The second segment of the firm’s securities portfolio, the controllable cash segment
(C$),holds securities earmarked for meeting controllable (knowable) outflows, such as
payroll,payables, taxes, and dividends. The required conversion date to cash is known. The
portfolio manager may attempt to choose securities whose maturities more accurately coincide
with particular known cash needs. For this segment, federal agency issues, CDs, commercial
paper, repos, bankers’ acceptances, Eurodollar deposits, and MMPs would warrant
consideration. Also, though safety and marketability would still be important issues of concern,
the portfolio manager would place more emphasis on the yield of the securities in this segment.

❏ Finally, for securities forming the firm’s free cash segment (F$) of its securities portfolio,
the date of needed conversion into cash is not known in advance but there is no overriding
need for quick conversion. The portfolio manager may feel that yield is the most important
characteristic of securities to be considered for this segment. Higher yields can generally be
achieved by investing in longer-term, less marketable securities with greater default risk.
Although the firm should always be concerned with marketability, some possibility of loss of
principal is tolerable, provided the expected return is high enough. Thus, in this segment (as in
the other two), the firm faces the familiar trade-off between risk and return.
16
Thanks!

17