Question

As a corporate treasurer who is unsure how soon funds will be needed, which type of money market investment might you prefer? Explain the trade-offs. Would your answer differ if you had a definite time period during which you would not need the money? Explain.

Answer 1

A repurcharse agreement is an instrument which can be preferred for such a need. It has the feature of call money i.e. Whenever the lender asks for it, the borrower has to pay it back. The tradeoff in using such type of instruments instead of a regular money market security like bill or notes is that because of this convenience to call the money whenever required, the interest rate we get on it is very less.

If we had a definite time period in mind, we would definitely go for instruments like bills, notes or bonds depending on our time period requirements because they will offer more value for our money.