FINANCIAL MANAGEMENT

DEPARTMENT: COMMERCE

CLASS AND SECTION: M.COM 2(A)

SUBJECT: FINANCIAL MANAGEMENT

TOPIC: MARKETABLE SECURITIES

SUBMITTED TO: MAM SADIA AKHTER

SUBMITTED BY: SIKANDER ABBASI

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Q: 1: write notes on management of marketable securities?

MARKETABLE SECURITIES:
Marketable securities are liquid financial instruments that can be quickly converted into
cash at a reasonable price. The liquidity of marketable securities comes from the fact
that the maturities tend to be less than one year, and that the rates at which they can be
bought or sold have little effect on prices.

KEY POINTS:
 Marketable securities are assets that can be liquidated to cash quickly.
 These short-term
term liquid securities can be bought or sold on a public stock
exchange or a public bond exchange.
 These securities
es tend to mature in a year or less and can be either debt or equity.
 Marketable securities include common stock, Treasury bills, and money market
instruments, among others.

Types of marketable securities:

Marketable securities

derivatives indirect
money market capital market investment

Money market securities

securities:
Money markets are the markets for financial products with maturities of less than one
year. The most common money market instruments include U.S. Treasury bills,
commercial paper, certificates of deposit (CDs), and repurchase agreements.
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Capital market securities:

Capital markets are the markets in which securities with maturities of greater than one
year are traded. The most common capital market securities include stocks, bonds, and
real estate investment trusts (REITs).

Derivatives:
A derivative security is a financial instrument whose value depends upon the value of
another asset. The main types of derivatives are futures, forwards, options, and swaps.
Indirect investment:
Indirect investment means buying into a property investment without actually buying the
property itself directly. For example, indirect investment might involve purchasing units
in a company or scheme which does own the property investment.
Management of marketable securities.
Marketable securities consist of short-term investments a firm makes with its temporarily
idle cash. Marketable securities can be sold quickly and converted into cash when
needed. Unlike cash, however, marketable securities provide a firm with interest
income.
Effective cash and marketable securities management is important in contemporary
companies, government agencies, and not-for-profit enterprises. Corporate treasurers
continually seek ways to increase the yields on their liquid cash and marketable security
reserves. Traditionally, these liquid reserves were invested almost exclusively in
negotiable certificates of deposit, Treasury bills, commercial paper, and repurchase
agreements (short-term loans backed by Treasury securities).However, in recent years
many treasurers have shown a willingness to take some additional risks to increase the
return on liquid assets. Financial managers constantly face these types of risk–return
trade-offs.
Many firms hold significant cash and marketable securities balances. For example, at
the end of 2003, Ford had a cash balance of nearly $26 billion. As we saw in the
“Financial Challenge” at the beginning of the chapter, Microsoft’s cash balance was $56
billion and growing (i.e., free cash flow) at a rate of $1 billion per month. These cash
balances give the firm a cushion to handle economic downturns and the ability to make
investments in other firms when the price is attractive. Large cash balances can make
firms attractive takeover targets for corporate raiders, who seek to redeploy these
surplus funds in more productive ways. For example, Kirk Kerkorian, Chrysler’s largest
stockholder, made an unsuccessful buyout offer for the company in 1995.He claimed
that Chrysler’s $7.3 billion cash stockpile was more than the company needed for its
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operations and that some of this hoard should be paid out to stockholders—either in the
form of cash dividends or share repurchases.
In addition to managing the cash and marketable securities already in the firm’s
possession, financial managers also aggressively seek to speed up cash collections
from customers and to slow down disbursements to suppliers. For example, when
Alaska sold its oil leases for $900 million, the state was paid with checks that had to
physically reach New York before the state could collect and invest the funds. The state
chartered a plane to take the checks to New York, thus saving one day in transit over
commercial carriers. The daily interest on these funds at the time was nearly $200,000,
and the plane charter cost only $15,000, resulting in $185,000 of additional returns to
the state. Cash managers continually look for ways to reduce the collection and clearing
time for checks received by the firm so that the funds can be put to work earning a
return.

Conservative cash:
Businesses that have conservative cash management policies tend to invest in short-
term marketable securities. They avoid long-term or riskier securities, such as stocks
and fixed income securities with maturities longer than a year. Marketable securities are
typically reported right under the cash and cash equivalents account on a company's
balance sheet in the current assets section.

Liquid assets vs marketable securities:

There are liquid assets that are not marketable securities, and there are marketable
securities that are not liquid assets. For example, a recently minted American Eagle
Gold Coin is a liquid asset, but it is not a marketable security. On the other hand, a
hedge fund may be a marketable security without being a liquid asset. Every marketable
security must still satisfy the requirements of being a financial security. It must represent
interest as an owner or creditor, carry an assigned monetary value, and be able to
provide a profit opportunity for the purchaser.

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