Author Question: The selection of a proper marketable-securities mix involves evaluation of certain criteria. What ... (Read 29 times)

leilurhhh · **on:** Jul 10, 2018

The selection of a proper marketable-securities mix involves evaluation of certain criteria. What are these
criteria and why are they important?

What will be an ideal response?

Question 2

Crawley, Inc has a line of credit with HNC Bank that allows the company to borrow up to 800,000
at an interest rate of 12 percent. However, Crawley, Inc must keep a compensating balance of 18
percent of any amount borrowed on deposit at the bank.

Crawley, Inc does not normally keep a
cash balance account with HNC Bank. What is the effective annual cost of credit?
A) 12.40 B) 12.83 C) 15.47 D) 14.63

ecox1012 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Financial risk, interest rate risk, liquidity, taxability, and yields should be evaluated. Financial risk (in this setting)
refers to the possibility of default on the terms of the issue. Interest rate risk refers to the uncertainty of expected
returns attributable to a change in interest rates. Liquidity is the ability to transform a security into cash without
significant loss of value. Although not as significant as the previous criteria, the tax liability of the instruments should
be evaluated. Yield evaluation is essentially a risk-return analysisNis a higher return on investment worth the higher
level of financial risk, interest rate risk, etc.

Answer to Question 2

D