Short-term investment returns: money market instruments

Your report must:

1. Be presented in Word file format

2. Analysis must be between 3 to 5 pages maximum, including spreadsheet analysis

3. Excel spreadsheet is embedded into the Word file

4. Submit Excel file separately

Part of your responsibilities as a junior financial analyst is researching and identifying potential short term liquid investment options for your firm. These investment vehicles are at times used by the firmduring periods when their cash inflows exceed projections. The firm, at times, uses excess cash topurchase short-term debt instruments providing a low, but safe marginal return on invested capital.Your Director, who reports to the firm’s Chief Financial Officer (CFO) has come to you seeking yourrecommendation on short-term investment options for the upcoming year. The Director has asked forrecommendations and a report illustrating your optimal analysis for investing $2.5m of excess cash.Current background info: We have a potential impending compound money market problem: The U.S. isissuing more debt, in part due to the recent tax cuts. Simultaneously, the Fed, China, Japan and to alesser degree Russia have been reducing their holdings of U.S. Debt. Therefore, if the U.S. TreasuryDepartment can’t get entities to their positions holding U.S. debt, then the pressure to increase interestrates to make newly issued securities attractive increases. Increased interest rates at the Treasurymeans securities prices fall with cascading impacts.Therefore, the current interest rate environment is one where rates are expected to increase.

Parameters for the research and analysis report are as follows:

1. Investments selections are primarily short term (one year or less), but will consider U.S. TreasuryBills of shorter duration as well as TIPS.

2. A minimum of 3 short term debt money market security types are to be recommended. Theymay include Federal money market bills, U.S. Savings Bonds, CDs, U.S. Treasury Notes, TreasuryBills, and TIPS.a. Note: money market investments of the range of two to five years are acceptable.b. However, no more than 40% of the portfolio can be invested in a security of withduration of greater than 12 months.

3. A recommendation on the optimal allocation of $2.5 m across the investment portfolio isrequired.

4. Current (as of the date of this assignment) rates and investments are to be used.

The analysis report to be presented to the Director is to include:

1. Your concise statement and recommendation of the specific short-term investment options thatmeets the firm’s criteria.Followed by:

2. A detailed summary of the investment asset and the parameters you will use in which to baseyour recommendation.

3. A detailed description of the upside and downside risk of each investment. The latter is ofparticular importance as the firm may decide to manage excess cash in one or more vehicles forlonger than one year.

4. Source identifier for all investment selectionsa. Example: website URL5.

A spreadsheet (embedded into the report) illustrating the following:a. Asset category/classificationb. Specific money market instrument identifieri. Example: U.S. Treasury CUSIP

6. EAR for each investment

7. YTM for each investmenta. If held to maturityb. If sold at the end of 12 months

8. Total return for investment portfolio if held to maturity

9. Spreadsheet model is to include all cell-based formulas for all calculationsYour conclusion is to summarize the recommendation made in item #1 aboveFormat for report.