Question

Which of the following is not a reason that firms typically hold cash? a. to make...

Which of the following is not a reason that firms typically hold cash?

a.

to make routine transactions

b.

to satisfy compensating balance requirements

c.

to earn interest

d.

to be able to respond to emergencies and opportunities
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Answer #1

The correct answer is Option C(to earn interest).

The Businesses need cash for day to day working or working capital requirements. Primarily, cash is required :

  • To meet daily requirements or to make routine transactions.
  • To meet any contingencies or emergencies so that the business no longer needs to face the cash crunch.
  • To satisfy compensating balance requirements.

If a business has to earn some interest, it will park the funds in a bank or any fixed interest paying the instrument. Thus, To earn interest is not a reason for holding cash.

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