Evaluating Cash Equivalents
Tyson Furniture has $100,000 in excess cash that it wants to invest in one or more cash equivalents. The treasurer has researched two money market accounts and two certificates of deposit (CDs) offered by four major banks. This is the information she gathered:
Investment Institution | Investment Type | Minimum Investment | Interest Rate | Penalty for Early Withdrawal? | Financial Risk |
Fidelity Bank | Money market account | $ 2,500 | 0.05% | No | Very low |
Bank of America | Money market account | 10,000 | 0.08 | No | Very low |
Discover Bank | 90-day CD | 2,500 | 0.90 | Yes | Very low |
Commerce Bank | 90-day CD | 2,500 | 0.15 | Yes | Very low |
All of these accounts are FDIC insured for up to $250,000.
Suggest how Tyson Furniture might allocate its $100,000 cash among these four opportunities. Discuss the trade-offs that management must consider.
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