Your corporation Western Technology, Inc. wants to invest $100, 000 in a short term security for one-year. It is your responsibility to research and recommend the best investment vehicle for the company.
The current checking account of the corporation has an EAR of 0.1 percent. The corporation is in the 33 percent federal marginal tax bracket and in a 6 percent state marginal tax bracket. You expect inflation to be .5 percent this year. There are four short-term investments that you are exploring.
- CD with a 12-month maturity with an 1.88 percent APR that compounds monthly
- CD with a 12-month maturity with a 1.71 percent APR that compounds quarterly
- A $50,000 Treasury bill with a maturity of one year that is with a market value of $49,850 dollar discount from face value (market value). (You will be required to purchase two Treasury bills.)
- Money Market Account for one year with a 1.10 APR that compounds monthly.
When you communicate your rationale for your recommendation include the following:
- Which of the short term investments is the best alternative?
- Did taxes influence your decision?
- Account for the difference between compounding and discounting.
- Explain which of the investment candidates are considered "riskless" and how this impacted your decision making.
- Describe the difference between a money market mutual fund and money market instruments.