bre44380_ch30_787-812.indd 800 10/06/15 10:57 AM
800 Part Nine Financial Planning and Working Capital Management
In September 2014, Apple was sitting on a $155.3 billion mountain of cash and fixed income
investments, amounting to two-thirds of the company’s total assets. Of this sum, $10.2 billion
was kept as cash and the remainder was invested as follows:Fixed Income Investments Value at Cost ($ millions)Money market and mutual funds $ 4,077
U.S. Treasury and agency securities 30,513
Non–U.S. government securities 6,925
Certificates of deposit and time deposits 3,832
Commercial paper 475
Corporate securities 85,431
Municipal securities 940
Mortgage- and asset-backed securities 12,907
Total $145,10030-4 Marketable Securities
Most companies do not have the luxury of such huge cash surpluses, but they also park any
cash that is not immediately needed in short-term investments. The market for these invest-
ments is known as the money market. The money market has no physical marketplace. It
consists of a loose collection of banks and dealers linked together by telephones or through
the Web. But a huge volume of securities is regularly traded on the money market, and com-
petition is vigorous.
Most large corporations manage their own money-market investments, but small compa-
nies sometimes find it more convenient to hire a professional investment management firm or
to put their cash into a money-market fund. This is a mutual fund that invests only in low-risk,
short-term securities.^15 Despite its large cash surplus, Apple invested a small proportion of its
money in money-market funds.
The relative safety of money-market funds has made them particularly popular at times of
financial stress. During the credit crunch of 2008 fund assets mushroomed as investors fled
from plunging stock markets. Then it was revealed that one fund, the Reserve Primary Fund,
had incurred heavy losses on its holdings of Lehman Brothers’ commercial paper. The fund
became only the second money-market fund in history to “break the buck,” by offering just
97 cents on the dollar to investors who cashed in their holdings. That week investors pulled
nearly $200 billion out of money-market funds, prompting the government to offer emergency
insurance to investors.Calculating the Yield on Money-Market Investments
Many money-market investments are pure discount securities. This means that they don’t pay
interest. The return consists of the difference between the amount you pay and the amount
you receive at maturity. Unfortunately, it is no good trying to persuade the Internal Revenue
Service that this difference represents capital gain. The IRS is wise to that one and will tax
your return as ordinary income.
Interest rates on money-market investments are often quoted on a discount basis. For
example, suppose that three-month bills are issued at a discount of 5%. This is a rather com-
plicated way of saying that the price of a three-month bill is 100 − (3/12) × 5 = 98.75. There-
fore, for every $98.75 that you invest today, you receive $100 at the end of three months. The(^15) We discussed money-market funds in Section 17-3.