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| The Gershenfeld Foundation was established 25 years ago to encourage, promote, and support research in the physical sciences. A wide range of industrial corporations contribute money in support of the foundation’s work. The foundation has awarded research grants at a rate commensurate with its contributions and portfolio earnings. Gershenfeld’s contributions have increased significantly the past few months. The results of the foundation’s recent fund drive exceeded the expectations of the Board of Trustees. New research grants are being reviewed and evaluated, but a final decision on which grants to fund and the amount of funding will not be made for at least 60 days. Thus, Gershenfeld has an excess cash position that is expected to continue for two months. The Board of Trustees has instructed the foundation’s Executive Director to invest the excess cash during this interim period. The Executive Director has been instructed to earn the highest possible yield while maintaining marketability and safety of principal. The types of investments that the Executive Director is considering for the use of $3.5 million of excess cash are (1) certificates of deposit, (2) U.S. treasury bills, and (3) preferred stock of domestic corporations. Questions A. Define each of the following financial instrument characteristics and explain the effect each has on the yield of investments. 1. Default risk. 2. Marketability. 3. Maturity. B. Evaluate each type of investment being considered by Gershenfeld’s Executive Director in terms of default risk, marketability, and maturity. C. Discuss the suitability of each type of investment being considered by the Executive Director for Gershenfeld Foundation’s particular situation. |