Money Market
In the above discussion of the reasons for holding cash and near-cash assets, It was suggested that near-cash, interest-earning assets could be substituted for cash when the motivation for holding these assets is the hedging
of cash flow uncertainties or is the temporary investment of surplus funds.
In either case, a primary concern of the cash manager is the safety and liquidity of the investment instrument used, since the money will eventually be needed for the operations of the firm. Near-cash assets of high safety and liquidity are traded in the money market. For larger corporations with strong financial positions, the money market also provides a source of short-term borrowings.
It is important for the student of working capital management to be familiar
With the basic instruments of the money market that are used by many firms
as investment alternatives to cash and by larger firms as financing vehicles.
While all the instruments traded in this market are quite sate relative to other investments (such as common stock), they differ somewhat in risk and return.
One difference in per-period investment return is the yield curve effect, also
known as the term structure of interest rates.
See James Vander Weide and Steven Maier, Managing Corporate Liquidity:
An introduction to Working Capital Management (New York: John Wiley. 1985). p. 4,
See Jarl Kallberg and Kenneth Parkinson, Current Asset Management: Case,
Credit, and Inventory (New York: Wiley, 1984), pp. 76-8. Further, if firms choose
to use one or more banks that require compensating balances rather than tees, it is
possible to convert required compensating balances into equivalent fees: see Kallberg and Parkinson, Current Asset Management.
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