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Publish On: 2019-05-20

Andy More

Total Post: 752

Question: While selecting investment opportunities what safety should a firm has to follow?

Reply On: 2013-06-22

Priancka

Total Post: 8

ANS: While selecting investment opportunities what safety should a firm has to follow?

A firm can invest is excess cash in many types of securities or short-term investment opportunities. As the firm invests its temporary cash balance, its primary criterion in selecting a security or investment opportunities will be its quickest convertibility into cash, when the need for cash arises. Usually, a firm would be interested in receiving as high a return on its investment as is possible. But the higher returns yielding securities or investment alternatives are relatively more risky. The firm would invest in very safe securities as the cash balance invested in them is needed in near future. Thus, the firm would tend to invest in the highest yielding marketable securities subject to the constraint that the securities have acceptable level of risk. The risk referred here is the default risk. The default risk means the possibility of default in the payment of interest or principal on time and in the amount promised.

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