PREVIOUS YEAR SOLVED PAPERS - July 2018
72. Risk of a portfolio can be minimised by which one of the following?
- A
Combining two securities having perfect positive correlation in their expected returns.
- B
Combining two securities having perfect negative correlation in their expected returns.
- C
Combining two securities having partially positive correlation in their expected returns.
- D
Combining two securities having partially negative correlation in their expected returns.
73. The certificate which evidences an unsecured corporate debt of short-term maturity, is known as:
- Option : D
- Explanation : A Treasury bill is a short-term debt of the US Government. The bills are sold on an auction basis at a discount from face value. Since the US Government is continually borrowing to pay off debts, Treasury bills are issued on a very frequent basis. Biddings are closed by the US Treasury weekly for 91- and 182-day debt issues and monthly for 9- and 12-month bills. Short maturities and the backing of the US Government make them desirable investments.
Although the market is quite short-term, an active secondary market has developed. Therefore, bills can be traded before the maturity date, adding to their liquidity. Treasury bills are a desirable short-term investment tool for corporate investors because of the high level of liquidity and low level of risk they carry.
Commercial paper is a short-term debt issued by finance companies and some other corporations. Interest rates for commercial paper are generally higher than for Treasury bills because of the risk factors involved in private firms. Many companies use commercial paper to supplement bank loans. In general, it is a less expensive method of financing for prime quality obligatory than loans (because banks are not used as intermediaries) and may fill a need at a time when the issuance of long-term debt is not appropriate. The issuance of commercial paper lacks the supportive, interactive nature of a relationship between a corporation and a commercial bank.
Commercial paper may be sold directly by the issuing corporation or through a dealer. Since dealers screen the instruments to a certain extent, commercial paper placed by a dealer may be less risky for an investor, although commercial paper directly placed by some major corporations is of very high quality. The investor holds an unsecured short-term promissory note as evidence of the debt, and the instrument is tradable in money markets.
