Page 381 - F1 Integrated Workbook STUDENT 2018

Short term finance and investments

2.5 Short-dated government bonds

Entities can invest temporary surplus cash in government bonds. If they do:

 they will receive interest on the due payment dates

 they can liquidate their investment at any time by selling the bonds in the
secondary market

 if the bonds are short-dated when purchased, they can hold the bonds to
maturity and have them redeemed at par.

However, there is some price risk with bonds, particularly longer-dated bonds. If
interest rates change in the market, the market value of bonds will rise or fall. Bond
prices rise when interest rates fall, but prices fall when interest rates go up. The
movement in price is greater for longer-dated bonds.

2.6 Other short-term investments

This chapter has described the short-term investments that are most commonly
purchased or used by entities. There are other short-term investments such as:

 corporate bonds, and

 commercial paper (CP).

These are more likely to be purchased by investment institutions rather than by
entities with a short-term cash surplus.

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