Problem:
(Buying and selling marketable securities)
Pearl Islands Tour Operator, located in the Pacific Ocean near Panama City, has effectively collected $1,500,000 in excess cash that it plans to invest in marketable securities. The firm will have to pay total transaction costs of $30,000 to buy and sell the securities.
A) Would you recommend purchasing the securities if they yield 8.25 percent annually and are held for
1. One month?
2. Two months?
3. Three months?
4. Six months?
5. One year?
B) What minimum required yield would the securities have to return for the firm to hold them for 3 months? ( What is the break-even yield for a 3-month holding period?)