FIN2101
Business Finance II
Module 4
Working Capital Management
(Week 1)
Student Activities (Inventory)
Reading
Text,Chapter 17 (pp,632-8 only)
Text Study Guide,Chapter 17 (part only)
Study Book,Module 4.2 (pp,4.4 to 4.12)
Tutorial Work
Tutorial Workbook,Self Assessment Activity 4.2
Text Study Guide,Chapter 17,T/F 7-10,MC 9 &
11-15,Problems 6,7,8 & 9
Student Activities (Cash)
Reading
Text,Chapter 16
Text Study Guide,Chapter 16
Study Book,Module 4.3 (pp,4.12 to 4.20)
Tutorial Work
Tutorial Workbook,Self Assessment Activity 4.3
Text Study Guide,Chapter 16
Working Capital Management
Inventory
Cash
Accounts receivable
Integrated approach required
Inventory
Manufacturer - raw
materials,work-in-
progress,finished
goods not sold.
Wholesaler/retailer -
goods in warehouse,
goods on shelves.
Objective
Balance the costs and benefits with the aim
of COST MINIMISATION.
Inventories should be increased as long as
the resulting savings exceed the total cost
of holding the additional inventory.
Inventory Costs
Acquisition (ordering) costs
Carrying (holding) costs
Stockout costs
Generally,there are carrying costs which
increase with the size of the company’s order
quantity and acquisition costs which decrease
with the size of the order quantity.
Economic Order Quantity
EOQ is the optimal order quantity for a
particular inventory item,given its predicted
usage,ordering cost and carrying cost.
EOQ Model Assumptions
Constant and certain demand
No quantity discounts available
No lead time
Constant ordering costs
Constant carrying costs per unit of inventory
EOQ Model
Time Periods
1 2 3
EOQ
Inventory Policy Costs
Total Cost = Ordering Cost + Carrying Cost
= (Number of Orders × Cost per
Order)
+ (Average Inventory × Carrying
Cost per Unit)
Inventory Policy Costs
2
Q
C
Q
S
O c o s t T o t a l
Total Costs Minimisation:
2
Q
C
Q
S
O
Economic Order Quantity (EOQ)
C
O S 2
= E O Q
Inventory Policy Costs
2
Q
C
Q
S
O c o s t T o t a l
Total Inventory Costs
2
Q
C
Q
S
O S p TC
Example 1
O = $30 S = 1 000 units p.a.
p = $20 per unit C = $3 per unit p.a.
Required,Calculate the EOQ and inventory
policy costs associated with ordering in the
EOQ.
DATA
Example 1 Solution
u n i t s 142or 141,42 =
3
000 1 30 2
=
C
O S 2
= E O Q
$424.27 =
$213.00 + $211.27 =
2
142
$3 +
142
000 1
$30 =
2
Q
C +
Q
S
O = c os t s T ot a l
Flat Quantity Discounts
Where discounts are available,the supply
price of an inventory item is relevant in
determining our EOQ for that item.
Example 2
20 cents per unit if ordered in lots of
200,i.e,p = $19.80 per unit,Should
the firm accept the quantity discount
and order in lots of 200?
DISCOUNT
Example 2 Solution
1 000 units × $0.20 = $200
Step 1 - Calculate the GAIN (p.a.)
$450,00 =
$300,00 + $150,00 =
2
200
$3 +
200
000 1
$30 =
2
Q
C +
Q
S
O = c os t s T ot a l
Step 2 - Determine New COSTS
$450.00 - $424.27 = $25.73
Gain of $200 > Incremental Costs of
$25.73,Therefore ACCEPT discount
& order in lots of 200 units.
Step 3 - Calculate Increase in Costs (p.a.)
Step 4 - Compare Gain to Cost Increase
Alternative Approach
250.00 $20 TC
424.27 $20 TC
2
Q
C
Q
S
O S p TC
200
142
Variable Quantity Discounts
A supplier might offer discounts which
vary according to the quantity ordered,eg:
0-99,$21 per unit
100-199,$20 per unit
Work very carefully through Example 4.5
in Study Book.
Variable Quantity Discounts
Calculate the optimal price-quantity
combination for no discounts - EOQ.
For each range,select the quantity nearest to
the optimal quantity in step 1.
Calculate the total inventory costs for each
combination of price and quantity for each
range to find the combination with the lowest
cost.
EOQ Model & Positive Lead Time
No lead time assumption is unrealistic.
Model can be adjusted to incorporate a
positive lead time.
Figure 4.3 in Study Book.
Example 4.2 in Study Book.
EOQ Model & Positive Lead Time
& Safety Stock
Can also relax the assumption of certain
demand.
Reorder point can be adjusted by adding a
safety stock to allow for uncertainty in
respect of demand.
Figure 4.4 in Study Book.
Example 4.3 in Study Book.
Other Techniques
ABC system
Inventory divided into 3 groups,based on the dollar
investment in each.
Materials requirement planning (MRP) system
Uses EOQ concepts to determine what to order,when to
order,and what priorities to assign to ordering materials.
Just-in-time (JIT) system
Materials arrive at the exact time they are needed for
production.
Cash Management
Cash and short-term
securities are the most
liquid assets of the
firm.
Cash in a bank
account is non-
productive.
Cash Management
The Issue:
What amount of liquid resources should a
firm aim to have at a particular point in time?
The Objective:
Minimise the cash balance but be able to pay
debts on time.
Reasons for Holding Cash
Transactions Motive
Safety Motive
Speculative Motive
Costs of Holding Cash
Opportunity cost of foregone investment
opportunities.
Loss of purchasing power of our money.
Cost of Holding Insufficient Cash
Loss of suppliers’ goodwill.
Lost sales.
Foregone suppliers’ discounts.
Overdraft costs.
Transaction costs.
Cash Management
Efficient management of the firm’s operating
and cash conversion cycles helps maintain a low
level of cash and contributes to shareholder
wealth maximisation.
Operating Cycle
The time from the point when the firm begins
to build inventory to the point when cash is
collected from sale of the resulting finished
product.
OC = Average age of inventory (AAI) + average
collection period (ACP)
Cash Conversion Cycle
The amount of time the firm’s cash is tied up
between payment for production inputs and
receipt of payments from the sale of the
resulting finished product.
CCC = OC – Average payment period (APP)
CCC = AAI + ACP - APP
Managing the CCC
Ideally firms would like to have a negative CCC.
Typically,firms have a positive CCC.
Strategies for minimising CCC:
Quick inventory turnover
Collect receivables as quickly as possible
Pay accounts payable as late as possible
Text,pp,589-92.
Cash Management Techniques
Management can speed up collections and slow
disbursements by taking advantage of the ‘float’
in the collection and payment system.
Float refers to the funds that have been
dispatched by a payer but are not yet in a form
that can be spent by the payee.
Delays in the transportation and processing of
cheques generate float.
Types of Float
Collection float is the amount of funds resulting from
the delay between when the payer deducts a payment
from its account and when the payee actually receives
the funds,A delay in the receipt of funds.
Disbursement float is the amount of funds resulting
from the delay between when a firm deducts a payment
from its account and the time when funds are actually
withdrawn from the account,A delay in the actual
withdrawal of funds.
Components of Float
Mail float – time between when a payer mails
the cheque and when it is received by the payee.
Processing float – the time between receipt of
a cheque by the payee and depositing it in an
account.
Clearing float – time between when a cheque is
deposited in an account and when the funds
actually become available.
Managing Float
The payee firm’s objective is to minimise the
collection float so that payments are available as
quickly as possible.
The payer firm’s objective is to slow down
payments so as to increase the disbursement
float.
Strategies for speeding up collections and
slowing down disbursements are discussed in
the text (pp.595-7).
Cash Management Models
As with inventory management,we have
holding costs and transaction costs in
respect of cash management.
Total costs = holding costs + transaction
costs.
Objective of Cash Management
To balance the holding and transaction costs
to minimise the total costs to gain the
optimal cash balance.
Baumol’s Model
Assumptions
certainty in respect of cash inflows,their
regularity and size,as well as cash outflows
transaction costs are a fixed amount,
irrespective of the nature and/or size of the
transaction
Derived from EOQ Model
Baumol’s Model Example
Demand = $20 000
Conversion cost = $30
Opportunity cost = 10%
Required,Calculate the economic conversion (ECQ)
and the costs associated with such a cash management
policy.
DATA
Example Solution
464 $3
0,10
000 $20 $30 2
f or m ) de c i m a l( i n c os t y op por t u n i t
c a s hf or de m a n d c os t c on v e r s i on 2
E C Q
$346,41
$173,20 $173,21
2
464 $3
0.10
464 $3
000 $20
$30
2
E C Q
c os t y oppor t u n i t
E C Q
c a s hf or de m a n d
c os t c on v e r s i on c os t T ot a l
Miller-Orr Cash Management Model
Emphasis on daily movements of cash.
Cash balance will follow a random walk.
Management moves between cash and short-
term investments.
Management acts to restore the cash balance to
a pre-determined return point.
Miller-Orr Model
Difficult and costly to keep a tight control of
cash balances on a day-to-day basis.
Considered a sound alternative.
Oriented to large organisations with a very large
number of transactions on a daily basis.
Miller-Orr Model (NO Overdraft)
3 f o r m d e c i m a li n c o s t y o p p o r t u n i td a i l y 4
f l o w sc a s h n e t d a i l y of v a r i a n c ec o s t c o n v e r s i o n 3 p o i n t R e t u r n
Example (NO Overdraft)
p.a,10% =c os t y O ppo r t u n i t
C os t ) ( F i x e d $25 =c os t C on v e r s i on
000 $3 = f l ow sc a s h n e t da i l y ofde v i a t i on S t a n da r d
Required,Calculate the return point and theupper and lower limits.
Solution
524 $25 =
poi n tr e t u r n 3 = U
$0 L
508 $8 =
365
0.10
4
000 $3 $25 3
=poi n t R e t u r n
3
2
Miller-Orr Model
(With Overdraft)
Wright adjusted the model to allow for
overdrafts.
A firm’s desire to stay in overdraft presumes that
it is cheaper to use the overdraft facility than it is
to allow the cash account to be in credit.
Yield on long-term investments > overdraft rate.
Miller-Orr Model
(With Overdraft)
Concerned with long-term investments.
Move between cash and long-term
investments.
Miller-Orr Model (WITH Overdraft)
3 r a t eo v e r d r a f t d a i l y -c o s t y o p p o r t u n i td a i l y 4
f l o w sc a s h n e t d a i l y of v a r i a n c ec o s t c o n v e r s i o n 3 p o i n t R e t u r n
Example (WITH Overdraft)
Required,Calculate the return point and theupper and lower limits.
p.a,8% r a t eO v e r dr a f t
p.a,10% =c os t y O ppor t u n i t
C os t ) ( F i x e d $200 =c os t C on v e r s i on
000 $3 = f l ow sc a s h n e t da i l y ofde v i a t i on S t a n da r d
Solution
$0 U
098 $29 =
365
0.08-0.10
4
000 $3 $200 3
=poi n t R e t u r n
3
2
196) ( $58 =
L a bov e 098 $29 =poi n t R e t u r n
294 $87 =
Ube l ow 294 $87 =
Ube l owpoi n t r e t u r n 3 = L?
Assumptions
Access to long-term investments.
Constant yield on short-term investments.
Immediate action can be taken when a
control limit is reached.
Fixed transaction costs.
Conclusions on Miller-Orr
Felt to be useful for managers to help them
determine what they should be doing as far
as cash management is concerned.
Nevertheless,a simplistic model based on
unrealistic assumptions.
Excess cash
make investment in marketable securities
Two basic characteristics:
a ready market/active secondary market
safety of principal,safety/liquidity(maturity)/profitability
Classifications of marketable securities
Government issues
Treasury notes,Commonwealth bonds,State government issues
Non-government issues
CDs,commercial bills and promissory notes
Classifications of marketable securities
1.Treasury bills,
it was issued by the treasury department
enjoy some tax preferential tax treatment
Sold at a discount
Risk involved in the Treasury bills
1) No default /credit risk
2) Interest rate risk
3) Foreign exchange rate risk
4) Inflation risk
2,Federal agency issue
Government National Mortgage Association(Ginnie Mae)
Federal Home Loan Banks(FHLBs),discount securities
Federal Farm Credit Bank (FFCBs):coupon securities
3,Large negotiable CD:
Created by citibank to circumvent the Q
Issued by large corporation and finance corporation
3,Bank acceptances
Time draft drawn on and accepted by a bank
Facilitate the import-export trade business
4.commercial paper
Short-term unsecured promissory notes issued by large
corporations and finance corporations
General Motors Acceptance Corporation(GMAC)
Low liquidity( no active secondary market) and high
default risk
Business Finance II
Module 4
Working Capital Management
(Week 1)
Student Activities (Inventory)
Reading
Text,Chapter 17 (pp,632-8 only)
Text Study Guide,Chapter 17 (part only)
Study Book,Module 4.2 (pp,4.4 to 4.12)
Tutorial Work
Tutorial Workbook,Self Assessment Activity 4.2
Text Study Guide,Chapter 17,T/F 7-10,MC 9 &
11-15,Problems 6,7,8 & 9
Student Activities (Cash)
Reading
Text,Chapter 16
Text Study Guide,Chapter 16
Study Book,Module 4.3 (pp,4.12 to 4.20)
Tutorial Work
Tutorial Workbook,Self Assessment Activity 4.3
Text Study Guide,Chapter 16
Working Capital Management
Inventory
Cash
Accounts receivable
Integrated approach required
Inventory
Manufacturer - raw
materials,work-in-
progress,finished
goods not sold.
Wholesaler/retailer -
goods in warehouse,
goods on shelves.
Objective
Balance the costs and benefits with the aim
of COST MINIMISATION.
Inventories should be increased as long as
the resulting savings exceed the total cost
of holding the additional inventory.
Inventory Costs
Acquisition (ordering) costs
Carrying (holding) costs
Stockout costs
Generally,there are carrying costs which
increase with the size of the company’s order
quantity and acquisition costs which decrease
with the size of the order quantity.
Economic Order Quantity
EOQ is the optimal order quantity for a
particular inventory item,given its predicted
usage,ordering cost and carrying cost.
EOQ Model Assumptions
Constant and certain demand
No quantity discounts available
No lead time
Constant ordering costs
Constant carrying costs per unit of inventory
EOQ Model
Time Periods
1 2 3
EOQ
Inventory Policy Costs
Total Cost = Ordering Cost + Carrying Cost
= (Number of Orders × Cost per
Order)
+ (Average Inventory × Carrying
Cost per Unit)
Inventory Policy Costs
2
Q
C
Q
S
O c o s t T o t a l
Total Costs Minimisation:
2
Q
C
Q
S
O
Economic Order Quantity (EOQ)
C
O S 2
= E O Q
Inventory Policy Costs
2
Q
C
Q
S
O c o s t T o t a l
Total Inventory Costs
2
Q
C
Q
S
O S p TC
Example 1
O = $30 S = 1 000 units p.a.
p = $20 per unit C = $3 per unit p.a.
Required,Calculate the EOQ and inventory
policy costs associated with ordering in the
EOQ.
DATA
Example 1 Solution
u n i t s 142or 141,42 =
3
000 1 30 2
=
C
O S 2
= E O Q
$424.27 =
$213.00 + $211.27 =
2
142
$3 +
142
000 1
$30 =
2
Q
C +
Q
S
O = c os t s T ot a l
Flat Quantity Discounts
Where discounts are available,the supply
price of an inventory item is relevant in
determining our EOQ for that item.
Example 2
20 cents per unit if ordered in lots of
200,i.e,p = $19.80 per unit,Should
the firm accept the quantity discount
and order in lots of 200?
DISCOUNT
Example 2 Solution
1 000 units × $0.20 = $200
Step 1 - Calculate the GAIN (p.a.)
$450,00 =
$300,00 + $150,00 =
2
200
$3 +
200
000 1
$30 =
2
Q
C +
Q
S
O = c os t s T ot a l
Step 2 - Determine New COSTS
$450.00 - $424.27 = $25.73
Gain of $200 > Incremental Costs of
$25.73,Therefore ACCEPT discount
& order in lots of 200 units.
Step 3 - Calculate Increase in Costs (p.a.)
Step 4 - Compare Gain to Cost Increase
Alternative Approach
250.00 $20 TC
424.27 $20 TC
2
Q
C
Q
S
O S p TC
200
142
Variable Quantity Discounts
A supplier might offer discounts which
vary according to the quantity ordered,eg:
0-99,$21 per unit
100-199,$20 per unit
Work very carefully through Example 4.5
in Study Book.
Variable Quantity Discounts
Calculate the optimal price-quantity
combination for no discounts - EOQ.
For each range,select the quantity nearest to
the optimal quantity in step 1.
Calculate the total inventory costs for each
combination of price and quantity for each
range to find the combination with the lowest
cost.
EOQ Model & Positive Lead Time
No lead time assumption is unrealistic.
Model can be adjusted to incorporate a
positive lead time.
Figure 4.3 in Study Book.
Example 4.2 in Study Book.
EOQ Model & Positive Lead Time
& Safety Stock
Can also relax the assumption of certain
demand.
Reorder point can be adjusted by adding a
safety stock to allow for uncertainty in
respect of demand.
Figure 4.4 in Study Book.
Example 4.3 in Study Book.
Other Techniques
ABC system
Inventory divided into 3 groups,based on the dollar
investment in each.
Materials requirement planning (MRP) system
Uses EOQ concepts to determine what to order,when to
order,and what priorities to assign to ordering materials.
Just-in-time (JIT) system
Materials arrive at the exact time they are needed for
production.
Cash Management
Cash and short-term
securities are the most
liquid assets of the
firm.
Cash in a bank
account is non-
productive.
Cash Management
The Issue:
What amount of liquid resources should a
firm aim to have at a particular point in time?
The Objective:
Minimise the cash balance but be able to pay
debts on time.
Reasons for Holding Cash
Transactions Motive
Safety Motive
Speculative Motive
Costs of Holding Cash
Opportunity cost of foregone investment
opportunities.
Loss of purchasing power of our money.
Cost of Holding Insufficient Cash
Loss of suppliers’ goodwill.
Lost sales.
Foregone suppliers’ discounts.
Overdraft costs.
Transaction costs.
Cash Management
Efficient management of the firm’s operating
and cash conversion cycles helps maintain a low
level of cash and contributes to shareholder
wealth maximisation.
Operating Cycle
The time from the point when the firm begins
to build inventory to the point when cash is
collected from sale of the resulting finished
product.
OC = Average age of inventory (AAI) + average
collection period (ACP)
Cash Conversion Cycle
The amount of time the firm’s cash is tied up
between payment for production inputs and
receipt of payments from the sale of the
resulting finished product.
CCC = OC – Average payment period (APP)
CCC = AAI + ACP - APP
Managing the CCC
Ideally firms would like to have a negative CCC.
Typically,firms have a positive CCC.
Strategies for minimising CCC:
Quick inventory turnover
Collect receivables as quickly as possible
Pay accounts payable as late as possible
Text,pp,589-92.
Cash Management Techniques
Management can speed up collections and slow
disbursements by taking advantage of the ‘float’
in the collection and payment system.
Float refers to the funds that have been
dispatched by a payer but are not yet in a form
that can be spent by the payee.
Delays in the transportation and processing of
cheques generate float.
Types of Float
Collection float is the amount of funds resulting from
the delay between when the payer deducts a payment
from its account and when the payee actually receives
the funds,A delay in the receipt of funds.
Disbursement float is the amount of funds resulting
from the delay between when a firm deducts a payment
from its account and the time when funds are actually
withdrawn from the account,A delay in the actual
withdrawal of funds.
Components of Float
Mail float – time between when a payer mails
the cheque and when it is received by the payee.
Processing float – the time between receipt of
a cheque by the payee and depositing it in an
account.
Clearing float – time between when a cheque is
deposited in an account and when the funds
actually become available.
Managing Float
The payee firm’s objective is to minimise the
collection float so that payments are available as
quickly as possible.
The payer firm’s objective is to slow down
payments so as to increase the disbursement
float.
Strategies for speeding up collections and
slowing down disbursements are discussed in
the text (pp.595-7).
Cash Management Models
As with inventory management,we have
holding costs and transaction costs in
respect of cash management.
Total costs = holding costs + transaction
costs.
Objective of Cash Management
To balance the holding and transaction costs
to minimise the total costs to gain the
optimal cash balance.
Baumol’s Model
Assumptions
certainty in respect of cash inflows,their
regularity and size,as well as cash outflows
transaction costs are a fixed amount,
irrespective of the nature and/or size of the
transaction
Derived from EOQ Model
Baumol’s Model Example
Demand = $20 000
Conversion cost = $30
Opportunity cost = 10%
Required,Calculate the economic conversion (ECQ)
and the costs associated with such a cash management
policy.
DATA
Example Solution
464 $3
0,10
000 $20 $30 2
f or m ) de c i m a l( i n c os t y op por t u n i t
c a s hf or de m a n d c os t c on v e r s i on 2
E C Q
$346,41
$173,20 $173,21
2
464 $3
0.10
464 $3
000 $20
$30
2
E C Q
c os t y oppor t u n i t
E C Q
c a s hf or de m a n d
c os t c on v e r s i on c os t T ot a l
Miller-Orr Cash Management Model
Emphasis on daily movements of cash.
Cash balance will follow a random walk.
Management moves between cash and short-
term investments.
Management acts to restore the cash balance to
a pre-determined return point.
Miller-Orr Model
Difficult and costly to keep a tight control of
cash balances on a day-to-day basis.
Considered a sound alternative.
Oriented to large organisations with a very large
number of transactions on a daily basis.
Miller-Orr Model (NO Overdraft)
3 f o r m d e c i m a li n c o s t y o p p o r t u n i td a i l y 4
f l o w sc a s h n e t d a i l y of v a r i a n c ec o s t c o n v e r s i o n 3 p o i n t R e t u r n
Example (NO Overdraft)
p.a,10% =c os t y O ppo r t u n i t
C os t ) ( F i x e d $25 =c os t C on v e r s i on
000 $3 = f l ow sc a s h n e t da i l y ofde v i a t i on S t a n da r d
Required,Calculate the return point and theupper and lower limits.
Solution
524 $25 =
poi n tr e t u r n 3 = U
$0 L
508 $8 =
365
0.10
4
000 $3 $25 3
=poi n t R e t u r n
3
2
Miller-Orr Model
(With Overdraft)
Wright adjusted the model to allow for
overdrafts.
A firm’s desire to stay in overdraft presumes that
it is cheaper to use the overdraft facility than it is
to allow the cash account to be in credit.
Yield on long-term investments > overdraft rate.
Miller-Orr Model
(With Overdraft)
Concerned with long-term investments.
Move between cash and long-term
investments.
Miller-Orr Model (WITH Overdraft)
3 r a t eo v e r d r a f t d a i l y -c o s t y o p p o r t u n i td a i l y 4
f l o w sc a s h n e t d a i l y of v a r i a n c ec o s t c o n v e r s i o n 3 p o i n t R e t u r n
Example (WITH Overdraft)
Required,Calculate the return point and theupper and lower limits.
p.a,8% r a t eO v e r dr a f t
p.a,10% =c os t y O ppor t u n i t
C os t ) ( F i x e d $200 =c os t C on v e r s i on
000 $3 = f l ow sc a s h n e t da i l y ofde v i a t i on S t a n da r d
Solution
$0 U
098 $29 =
365
0.08-0.10
4
000 $3 $200 3
=poi n t R e t u r n
3
2
196) ( $58 =
L a bov e 098 $29 =poi n t R e t u r n
294 $87 =
Ube l ow 294 $87 =
Ube l owpoi n t r e t u r n 3 = L?
Assumptions
Access to long-term investments.
Constant yield on short-term investments.
Immediate action can be taken when a
control limit is reached.
Fixed transaction costs.
Conclusions on Miller-Orr
Felt to be useful for managers to help them
determine what they should be doing as far
as cash management is concerned.
Nevertheless,a simplistic model based on
unrealistic assumptions.
Excess cash
make investment in marketable securities
Two basic characteristics:
a ready market/active secondary market
safety of principal,safety/liquidity(maturity)/profitability
Classifications of marketable securities
Government issues
Treasury notes,Commonwealth bonds,State government issues
Non-government issues
CDs,commercial bills and promissory notes
Classifications of marketable securities
1.Treasury bills,
it was issued by the treasury department
enjoy some tax preferential tax treatment
Sold at a discount
Risk involved in the Treasury bills
1) No default /credit risk
2) Interest rate risk
3) Foreign exchange rate risk
4) Inflation risk
2,Federal agency issue
Government National Mortgage Association(Ginnie Mae)
Federal Home Loan Banks(FHLBs),discount securities
Federal Farm Credit Bank (FFCBs):coupon securities
3,Large negotiable CD:
Created by citibank to circumvent the Q
Issued by large corporation and finance corporation
3,Bank acceptances
Time draft drawn on and accepted by a bank
Facilitate the import-export trade business
4.commercial paper
Short-term unsecured promissory notes issued by large
corporations and finance corporations
General Motors Acceptance Corporation(GMAC)
Low liquidity( no active secondary market) and high
default risk
