Explanation:
Joshua's valid concern about bankers' acceptances is the lack of availability for certain maturities.
Bankers' acceptances (BAs) are typically created for specific trade transactions with specific terms (e.g., 30, 60, or 90 days), meaning they are not available in a continuous spectrum of maturities like Treasury bills or other money market instruments. This can make matching them to exact portfolio maturity needs challenging for a portfolio manager.
Choice A is less valid because a key advantage of BAs is that they are guaranteed by a bank, which typically has a strong credit rating, making default risk very low compared to other corporate short-term debt.
Choice C is incorrect because BAs are discount instruments and negative interest rates would be a broader macroeconomic condition affecting all short-term debt, not a disadvantage specific to bankers' acceptances.
Choice D is incorrect because BAs generally have an active and liquid secondary market, allowing investors to sell them before they mature if necessary.
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Q.5407 Joshua is a portfolio manager at AlphaOmega Investments. He's considering diversifying the firm's short-term investment portfolio by including bankers' acceptances. He recognizes that bankers' acceptances are short-term instruments primarily used in trade credit transactions, where a bank guarantees the payment of a customer for an export/import transaction. Joshua also acknowledges that they offer higher yields than T-bills but lower than Eurocurrency deposits, and they can be discounted at the Federal Reserve Bank. Despite these advantages, Joshua is concerned about certain disadvantages associated with bankers' acceptances. Based on his understanding, which of the following concerns about bankers' acceptances is the most valid?
A
The risk that the bank will default on its guarantee of the acceptance.
B
The availability of bankers' acceptances for certain maturities.
C
The possibility that bankers' acceptances could be subject to negative interest rates.
D
The inability to trade bankers' acceptances in the secondary market
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