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

Please explain in simplest terms I am very confused on this question

Answer 1

as the time for fund requirement is unknown it is very difficult to decide where to invest the money. Lets assume you have $25 million and you know that you will require this amount in next 4-5 years. Now you don't know the specific time when you will need how much money. Now what if you invest a major chunk of amount $ 3 million in long term investment so as to get the maximum return but the need for $4 million arises in between then you will face liquidity issues. Thus to mitigate this issue you will try to invest in liquid investments such as Treasury Bills and commercial papers. Here you will get less return on your investment and thus improper utilisation of resources.

Now if a definite time line is available we will invest according to it. Lets assume we don't need more than a million in next 1 year then you will invest rest amount in investments maturing after a year according to usage thus getting more returns. So all investment will be divided in short, medium and long term as per maturity to get maximum return.