Cash Management and Marketable Securities^215
Yields
All the characteristics we discussed above-default risk, maturity, and marketability-
affect yield. In general, the lower the default risk and the better the marketability, the
lower the yield. Securities with these desirable characteristics have higher prices, and
since price and yield are inversely related, lower yields.
The relationship between maturity and yields is more complex and changes over time.
On an average, short maturities yields less, other factors being equal, because they are
subject to less interest rate risk. Rates on short maturities, however, are more volatile
than those on longer maturities, and at times exceed the latter.
At any point in time, rates on the major types of money-market securities discussed
above are fairly close to one another. For equal maturities, the differentials usually are
small and are due to small differences in default risk and marketability.
Over time, the entire structure of short-term rates varies significantly. Such variations
are related to the business and monetary cycles, the demand for funds by individuals
and firms, and the credit policies of the RBI.
Collection & Disbursement Systems
Primary objective of a collection system is to receive value from the buyer as quickly
as possible. Secondary objective is to receive and process information associated with
the payment. The longer the delays the more the funds that will be tied up in it.
If we define the system in terms of the linear programming model, the objective function
that we need to minimise is:
Objective function:
Minimise ñ Cost of collection float
ñ Value of payment information
ñ Value of relationship with payers
- Collection system costs
- Cost of losses through theft/ fraud
- means that the function is to go with the objective (i.e., here to
minimise) and - means that it has to go against the stated objective
(i.e., to maximise rather than minimise in this case)
What is a float?
Float could be defined as the amount of funds represented by checks that have been
issued but not yet collected.
OR