Cash does not pay interest. Companies should invest funds that are not needed in daily transactions. Short-term investment is discussed in the reading.

Nominal rate: a rate of interest based on a security's face value. For a non-zero-bond, the coupon rate is the nominal rate.

A yield is the actual return on the investment if it is held to maturity.

• Money market yield and bond equivalent yield. Refer to Reading 6 [Discounted Cash Flow Applications].
• Discount-basis yield (also referred to as the investment yield basis) is often quoted in the context of U.S. T-securities: [(Face value - Purchase price) / (Face value)] x (360 / Number of days to maturity).

Strategies

Short-term investment strategies can be grouped into two types:

• Passive strategy.
  • One or two decision rules for making daily investments.
  • Safety and liquidity first.
  • Passive strategies must be monitored and the yield should be benchmarked against a comparable standard (such as a T-bill).

• Active strategy.
  • More daily involvement and a wider choice of investments.
  • Matching / mismatching: the timing of cash inflows and outflows.
  • A laddering strategy is a strategy in which a bond portfolio is constructed to have approximately equal amounts invested in each maturity within a given range (to reduce interest rate risk).

A company should have a formal, written investment policy or guideline that protects the company and its investment managers.