Math in the Workplace - Algebra
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Treasury Analyst
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Job Description: Has direct responsibility for managing corporate short-term borrowings and investments. |
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Problem:
The company has a debt payment due on May 1st in the amount of
$5,000,000. It currently has $5,000,000 available to meet the obligation;
but is not allowed to make the payment until the due date, May 1st.
The company would like to purchase an investment, which at maturity
would have a value equal to the amount of the debt payment-thus
allowing the excess cash to be used elsewhere.
Using the following assumptions, determine the price of the required investment and the amount of excess cash they are holding.
Assumptions:
- Debt payment required: $5,000,000 (P)
- Cash on hand: $5,000,000
- Interest rate (or discount rate) on investment: 6% (IR)
- Days until debt payment date: 63 (DM)
- Dollar Price: amount required to invest today to meet debt obligation in 63 days (DP)
- A year consist of 360 days for interest accrual formula: P·(1 - (IR·DM
360)) = DP
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FOREST PRODUCTS
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Solution:
P·(1-(IR·DM360)) = DP
$5,000,000 · (1-(.06 · 63 360)) = DP
$5,000,000 · (1-(.0105)) = DP
$5,000,000 · (.9895) = DP
$4,947,500 = DP
Cash available for other purposes = $52,500.00
($5,000,000 - $4,947,500)
Financial instruments such as this one are referred to as "discounted" and include Banker's Acceptances, Commercial Paper, Treasury Bills, and secondary Discount Notes.
