Question

Q4: You have been asked to develop a system that will track your company's short-term investments. Outline and discuss, in a general way, the steps you would use to accomplish that goal.

Answer 1

Short-term investments, also known as marketable securities or temporary investments, are those which can easily be converted to cash, typically within 5 years. Many short-term investments are sold or converted to cash after a period of only 3-12 months. Some common examples of short term investments include CDs, money market accounts, high-yield savings accounts, government bonds and Treasury bills. Usually, these investments are high-quality and highly liquid assets or investment vehicle

In General Companies in a strong cash position will have a short-term investments account on their balance sheet. As a result, the company can afford to invest excess cash in stocks, bonds, or cash equivalents to earn higher interest.

There is a basic requirement to treat as Short term investment

:- it should be easily convertible in to cash (Within 1 year), for example buying a IBM stock from recognized stock exchanges (Nothing but liquidity), in balance sheet it is considered as current asset.

Example of short term investment: -

Certificates of deposit (CDs): These deposits are offered by banks and typically pay a higher interest rate because they lock up cash for a given period. They are FDIC-insured up to $250,000.

Money market accounts: Returns on these FDIC-insured accounts will beat those on savings accounts, but require a minimum investment. Keep in mind that money market accounts differ from money market mutual funds, which are not FDIC-insured.

Treasuries: There are a variety of these government-issued bonds, such as notes, bills, floating-rate notes, and Treasury Inflation-Protected Securities (TIPS).

Bond funds: Offered by professional asset managers/investment companies, these funds are better for a shorter time frame and can offer better-than-average returns for the risk. Just be aware of the fees

Municipal bonds: These bonds, issued by local, state, or non-federal government agencies, can offer higher yields and tax advantages since they are often exempt from income taxes.

Peer-to-peer (P2P) lending: Excess cash can be put into play via one of these lending platforms that match borrowers to lenders.