Financial investment in US and Europe

A short-term investment that originated in 1961, the negotiable certificate of deposit (CD) is a large-denomination, negotiable time deposit at a commercial bank or savings institution paying a fixed or variables rate of interest for a specified time. Original maturities usually range from 30 days to 12 months. To be negotiable (able to be sold in the secondary market), most money-center banks require a minimum denomination of $100,000. A secondary market for CDs issued by large money-center banks does exist. However, this market is not is not as liquid as that for Treasury issues, because CDs are more heterogeneous than treasury issues. For examples, CDs differ widely with respect to the quality of the issuing bank, the maturity of the instrument and the stated interest rate. Because of less liquidity and slightly higher risk, yields on CDs are greater than those on Treasury bills of similar maturity, but about the same as those on bankers’ acceptances and commercial paper.

Eurodollars are bank deposits, denominated in US dollars, not subject to US bank regulations. Although most Eurodollars are deposited in banks in Europe, the term applies to any dollar deposit in foreign banks or in foreign branches of US banks. Eurodollars generally take the form of either Eurodollar time deposits (Euro TDs) or Eurodollar certificates of deposit (Euro CDs). Although EuroTDs are non-negotiable, most have relatively short maturities ranging from overnight to few months. The Euro CD, on the other hand, is a negotiable instrument like its domestic counterpart. For the large corporation having ready access to international money centers, the Eurodollar deposit is usually ann important investment option.

Money market Preferred stock: Beginning in 1982, a special type of preferred stock began to be issued, and it found considerable favor in the marketable securities portfolios of corporations. However, the dividend can be omitted by the issuing firm if its financial condition deteriorates. For these reasons, we do not usually think of preferred stock as being suitable for the marketable security portfolio of a corporation. However, the corporate investor gains a considerable tax advantage, in that generally 70% of the preferred stock dividend is exempt from federal taxation (The full dividend is subject to state income taxes)

This tax advantage, together with regulatory changes, prompted the innovation of various floating – rate preferred stock products. One of the largest in use today is money market preferred stock (MMP). With MMP, an auction is held every 49 days, a period that is beyond the minimum holding period required for a corporate investor to benefit from the federal corporate dividend tax exclusion. The auction process provides the investor with liquidity and relative price stability. It does not protect the investor against default risk. The new auction rate is set by the forces of supply and demand in keeping with interest rates in the money market. Corporations already holding MMPs on auction day have three options. They can (1) rebid, (2) enter a sell order, or (3) enter a hold order, in which case they retain their shares which yields the new rate.

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