Jasmine started a small business two years ago. Her business has now made some profit, and Jasmine notes that she has savings of a few thousand dollars in her bank account. She wants to invest this amount, but is doubtful because of the uncertainty of cash flows in her new business. Jasmine is concerned that she may need access to these funds on fairly short notice in the future. If she wants to get into the market for highly liquid securities, she should:
A) invest the funds in common stocks.
B) keep all of these funds in her checking account.
C) invest her excess cash into money market mutual funds.
D) use her excess cash to buy term deposits.

Question

Quizplus · Accepted Answer

Investing excess cash into money market mutual funds is the best choice for Jasmine as it provides a high degree of liquidity, safety, and competitive yields. Money market mutual funds invest in highly liquid, short-term debt securities issued by government entities, banks, and corporations, making them a low-risk investment option. Additionally, these funds can be easily redeemed, providing Jasmine with the necessary access to funds on short notice. On the other hand, investing in common stocks is highly risky and not suitable for someone who may require access to funds at any time. Similarly, keeping all the funds in her checking account offers no or minimal interest and is not a wise investment decision. Finally, while term deposits offer better interest rates compared to checking accounts, they usually have early withdrawal fees, which could be costly if Jasmine needs quick access to funds.

Jasmine Started a Small Business Two Years Ago