Essay Sample on Short-Term Investment Returns: Money Market Instruments

A money market is a form of trade that focuses on short-term debt investments. In the current case study, the best instruments feature those which ensure security, while also maximizing the returns. It also needs to be short-term so that the company can get a refund of the investment along with profits within a period of three to five years. Therefore, the recommended options include investing in USALLIANCE Credit Union, Vanguard Federal Money Market Fund (VMFXX), and American Express Bank.

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USALLIANCE Credit Union

(https://www.usalliance.org/investment-products/cd?dd_pm=none&dd_pm_cat=cds)

This credit union offers the best Certificates of Deposit (CDs) rates to its members. The one year rate is 2.30% and 5 years is 2.60% (Financial, 2020). Although it lacks a significant amount of capital, this credit union only invests in the highest quality assets. Therefore, their capital and any investments that the current company will make will be relatively safe. The minimum amount of deposit is $500, which makes it an easy target for investors who do not want to take the risk (Financial, 2020). However, the FDIC offers insurance for CDs by up to $250,000, which makes it safer to invest without the worry of losing money (Hooghiemstra, 2019).

Vanguard Federal Money Market Fund

(https://investor.vanguard.com/mutual-funds/profile/VMFXX)

This money market fund invests in U.S. government securities with an aim of providing current income and preserving principal investment for shareholders by maintaining a $1 share price ("Vanguard Mutual Fund Profile | Vanguard,"2020). Therefore, it is perceived as a conservative investment option offered by the company. Although the investments are short term, the total income that will be received at the end of the set period is dependent on the current interest rate (Kacperczyk & Schnabl, 2010). Therefore, it is a good deal for investors looking at short term options such as the current company. The minimum deposit is $3,000 ("Vanguard Mutual Fund Profile | Vanguard," 2020). There is a risk in the sense that any changes in the interest rate environment will also impact this fund (Guo, Wang & Yang, 2013). In addition, it is not insured by the FDIC, hence any losses will have to be experienced by both the Fund and the investor alike.

American Express Bank

(https://www.americanexpress.com/personalsavings/certificate-of-deposit-CD-accounts.html)

Choosing to invest in the CD of the American Express Bank is also another viable option for the company. The investment may last anywhere from six months to five years. The rates vary depending on the set time frame at the time of application ("CD Rates - Open a CD Account | American Express Savings," 2020). Once the investment has been deposited, one can only withdraw after its maturity to enjoy the interest rates. A penalty is applied for early withdrawals, and may even result in the loss of some of the principal. The high security offered is what makes this an alternative option for the current company.

Considering the quantitative analysis conducted above, it is evident that the best option is a certificate of deposit from the US Alliance credit union. Although American Express also offers a Certificate of Deposit, it has a lower interest which makes it lose its competitiveness in the market. Also, the Certificate of Deposit offered by the bank is not insured by the FDIC as is the case with that which is offered by a Credit Union. Therefore, security is what makes the US Alliance the best investment option.

If the investment amount is split equally across all these options, the risk that comes with each one of them will be managed. However, after the analysis, the best option that should get the maximum investment amount allowed is the US Alliance as it not only offers security for investments but also constant competitive interest rates (Hernandez, Brusa & Liu, 2011). At the end of maturity, the company should expect to get a total of 4.6% return on investment as compared to 0.3% that will be obtained from investing in the banking institution (See Table 1).

References

CD Rates - Open a CD Account | American Express Savings. (2020). Retrieved 23 January 2020, from https://www.americanexpress.com/personalsavings/certificate-of-deposit-CD-accounts.html

Financial, U. (2020). Certificate Accounts | High Yield Certificates | USALLIANCE Financial. Retrieved 23 January 2020, from https://www.usalliance.org/investment-products/cd?dd_pm=none&dd_pm_cat=cds

Guo, H., Wang, Z., & Yang, J. (2013). Time-Varying Risk-Return Trade-off in the Stock Market. Journal of Money, Credit and Banking, 45(4), 623-650. doi: 10.1111/jmcb.12018

Hernandez, R., Brusa, J., & Liu, D. (2011). An economic analysis of bank-issued market-indexed certificate of deposit a an option pricing approach. International Journal of Financial Markets and Derivatives, 2(3), 195. doi: 10.1504/ijfmd.2011.042600

Hooghiemstra, S. (2019). Money Market Fund Regulation. SSRN Electronic Journal. doi: 10.2139/ssrn.3492978

Kacperczyk, M., & Schnabl, P. (2010). Money Market Funds' Preferences for Short-Term Debt Characteristics. SSRN Electronic Journal. doi: 10.2139/ssrn.1659354

Vanguard Mutual Fund Profile | Vanguard. (2020). Retrieved 23 January 2020, from https://investor.vanguard.com/mutual-funds/profile/VMFXX