Answer (C) is correct . A small firm with surplus cash should invest for the highest return and lowest risk. The ability to convert the investment into cash without a loss of principal is also important. Money market mutual funds invest in money market certificates such as treasury bills, negotiable CDs, and commercial paper. Because of diversification, these mutual funds are superior to any single instrument.
Answer (A) is incorrect because A small firm may not have enough surplus cash to invest in commercial paper, which usually consists of secured or unsecured promissory notes of large corporations.
Answer (B) is incorrect because The transactions cost of bankers’ acceptances is high. A banker’s acceptance is a unique credit instrument used to finance both domestic and international “self-liquidating” transactions. It is usually initiated by a bank’s irrevocable letter of credit on behalf of the bank’s customer, on which the company doing business with the bank’s customer draws a time draft. The company discounts the time draft with the company’s local bank and receives immediate payment. The local bank forwards the time draft to the bank customer for payment.
Answer (D) is incorrect because An increase in interest rates could cause a substantial loss in principal.
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