Name:
Course:
Institution:
Lecturer:
Date:
Marketable Securities
Marketable securities are securities such as bonds, which are liquid, meaning that they can be converted easily into cash. They have short maturities, usually less than one year. They are a form of investment since companies usually use them as a way of preserving their cash, and using idle funds. The U.S. treasury marketable securities are meant to raise money for the operations of the federal government, and pay maturing obligations (Treasury Direct, 2011). Marketable securities have a ready market, and this reduces the time required to liquidate the securities. There are different marketing securities, and investors usually decide on the type of securities to purchase based on the liquidity and maturity of the securities.
Marketable securities can be classified into debt held to maturity, trading securities, and securities, which are available for sale. Debts held to maturity are a type of securities, which the company intends to hold until they mature. Financial institutions invest in trading securities when they want profits within a short period. Trading securities are bought and sold frequently. They are affected by changes in the market value, and this affects the net income. Securities available for sale are held by non-financial institutions, and they are meant for a specific cash need (Nikolai et al., 2009).
People or institutions wishing to invest in marketable securities have to consider the financial and interest rate risk attached to the type of security. Long-term securities such as treasury bonds are safe, but are affected by the interest rates. Companies invest in securities with the hope that they will earn an interest after the securities mature. Firms investing in securities hope to get the same amount of money they had invested, or more. They do not intend to make any losses. They also have to check the liquidity, and the amount to be taxed on the securities. Investors have to ensure that the securities are marketable at the par value. The investors have to ensure that they do not run the risk of the issuer defaulting by failing to them the interest or the amount promised. They have to check the creditworthiness of the issuer so that they can protect their investment.
Some types of marketable securities include commercial paper, banker’s acceptance and treasury bills. The U.S. treasury marketable securities include treasury bills, treasury notes, bonds, and treasury inflation-protected securities (Treasury Direct, 2011). The government offers these securities at public auctions when it wants to raise money for its expenses. Although the auctions are an open process, many of the bids offered by the treasury are taken up by brokerage firms and financial institutions, which then sell them in smaller quantities to the public, and this guarantees them a profit. The interest can be paid by installments, what is known as coupon payments, or it can be paid in whole once the securities mature. Many people opt for the government securities because they are safe. The government ensures that it pays all investors the full principal, and the interest earned. Other types of securities however have the advantage of ensuring higher yields. Treasury securities are exempt securities, and do not have to be registered since they are not subject to the Securities Act passed in 1933 (Boston Institute of Finance, 2005).
Treasury bills are short-term marketable securities offered by the treasury. They are usually issued at a discount, and are redeemed at the full market price. The treasury bills are usually sold in 4-week, 13-week, 26-week and 52-week maturities. The U.S. treasury auctions the bills weekly. The minimum amount, which the bills are sold at, is $1000 (Treasury Direct, 2011). They can be transferred easily since they do not bear the investor’s name. Treasury bills have remained popular despite the fact that they are low yielding. This is because they are risk free and they mature quickly. The bills are especially ideal for companies that need ready cash. Treasury notes are mid term securities, usually lasting more than one year, up to ten years. They pay a fixed rate of interest until the securities mature. Only the principal is redeemed after the security matures. Treasury notes can be sold below, at or above the face value, and the interest is usually paid after every six months (GAO, n. d.). Treasury bonds are long term marketable securities, which mature more than ten years after the date of issue. Like the treasury notes, they can be paid below, at or above the face value. The interest is paid after six months, and the investor is paid at face value once the bonds mature (GAO, n. d.).
Investors can decide to use the treasury inflation protected securities. The principal is adjusted after six months to reflect the value of the inflation, according to the consumer price index. The principal increases with inflation and the interest increases since it also depends on the adjusted principal. The inflation-protected securities are sold in five, ten or thirty year terms. Once the security matures, the investor gets the principal that has already been adjusted to reflect the inflation, or the original amount he or she had invested. Investors do not get less than they had invested. The principal decreases when there is a deflation, but the amount does not go below the face value. In non-competitive bids, investors can purchase up to $5 million worth of securities. In competitive bids, the maximum amount that investors can purchase is 35% of the amount offered (Treasury Direct, 2011). Repurchase agreements refer to the sale of government securities, whereby there is a promise of repurchase. The seller sells the securities to the borrower with the agreement that he will later buy back the securities on a particular date at a specified price. The set re-purchase price is usually higher than the initial selling price. The buyer usually knows the amount, which will be made when the transaction is done.
Large businesses, such as financial institutions, sell unsecured promissory notes, in the form of commercial paper, when they need the cash. Unlike the treasury bills, commercial papers are usually sold at high denominations. They can be issued by dealers or by the institutions offering them. Most institutions prefer to offer the commercial papers to the investors since they find it more profitable. Although commercial papers are short-term, they are not as popular as other short-term securities such as treasury bills. The returns gained on this investment are used in current assets. Commercial papers are only issued by institutions or companies with high credit ratings. The maturity of the commercial paper usually depends on the specific need, but it does not usually exceed 270 days. Most of the investors choose to hold their papers until they mature. Commercial papers hold a certain risk, because they depend on the creditworthiness of the issuer. They have a higher yield than the treasury securities because they do not have an active secondary market. Investors who purchase the commercial papers through dealers realize a higher yield than those purchasing the paper directly from the issuer.
Bankers’ acceptances are drafts mostly used in international trade. They are usually short-term, and most of them have a maturity of less than six months. They have a ready market because of the active trading. They are drawn on banks by companies dealing with foreign trade. The acceptances are bought and sold at a discount. When the bank accepts the drafts, it means that it will pay the holder of the draft the amount stated, once it matures. Banks can sell the acceptances directly or they can use other dealers. Dealers usually purchase the acceptances with the intent of selling them back to the investors. They are cautious about the credibility and creditworthiness of the bank. Large banks with large market share trade on the secondary markets. The acceptances depend on the exchange rates since the banks use their own rating. Banks have to be wary of the credibility of the customer so that they do not make any loss when financing the transaction. Banks have to ensure that customers can pay their debts.
Negotiable certificates of deposits are receipts offered by banks for cash, which has been deposited in the bank for a fixed period. The maturity of the certificate depends on the need of the investor, and it is negotiated between the issuer and the investor. Once the certificates mature, the investors receive the amount they had deposited in addition to the interest earned on the principal. Most banks prefer to issue the certificate in bearer form because it can be used in secondary markets. The negotiable certificates of deposits are safe, although they can be risky if the banks that had issued them collapsed. The certificates are not usually redeemed before maturity, although they are negotiable. The investor receives the face value and the interest earned once the investors redeem their security after maturity. They are issued in large amounts which range from $100 000 to $1 million (Boston Institute of Finance, 2005).
Marketable securities are important when the investors want to store cash for a short period. They attract investors because they are short-term, highly marketable and liquid. They are a better alternative than depositing the cash in the bank since they earn more interest. The type of the securities purchased depends on the intention of the investors. Some investors want to invest the money temporarily when they have idle funds. Others invest in securities so that they meet an expected need in the future. People prefer government securities because they are secure and guaranteed. When deciding the type of marketable securities to purchase, investors have to consider the liquidity, maturity, yield, financial, and investment risk. Treasury securities are low yielding, but they are more popular since they are safe and they have a ready market. Some other types of marketable securities have high yields, but they are risky.
References:
Boston Institute of Finance (2005). Boston Institute of Finance stockbroker course: Series 7 and series 63 test preparation. Hoboken, NJ: John Wiley and Sons
GAO (n. d.). Debt management. U.S. Government Accountability Office. Retrieved from http://www.gao.gov/special.pubs/longterm/debt/debtmanagement.html
Nikolai, A. L., Bazley, D. J., & Jones, P. J. (2009). Intermediate accounting. New York, NY: Cengage Learning
Treasury Direct (2011). Treasury marketables factsheet. Retrieved from http://www.treasurydirect.gov/news/presskit/presskit_marketables.htm
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]