Question 74

Government backing and low risk

Treasury bonds are attractive to firms with extra cash primarily due to their government backing and low risk. These bonds are issued by the U.S. Department of the Treasury, which means they are considered one of the safest investments available, thereby providing a secure option for firms looking to preserve their capital.

A) Ownership in the government

This option is incorrect because Treasury bonds do not confer ownership in the government. Instead, they represent a loan to the government, and investors receive interest payments in return. Ownership implies control or equity, which Treasury bonds do not provide.

B) Government backing and low risk

This is the correct answer as Treasury bonds are backed by the full faith and credit of the U.S. government. This backing significantly reduces the risk of default, making them a stable investment choice for firms seeking to safely manage their excess cash.

C) High returns with high risk

This option is incorrect because Treasury bonds typically offer lower returns compared to more volatile investments, such as stocks or corporate bonds. The appeal of Treasury bonds lies in their low risk, not high returns, making this statement misleading.

D) Daily liquidity

While Treasury bonds can be traded in secondary markets, the notion of daily liquidity is not a primary factor that makes them attractive to firms. The focus on safety and government backing is far more compelling for firms looking to invest excess cash securely.

Conclusion

In summary, the attractiveness of Treasury bonds to firms with extra cash stems from their government backing and low risk, which provide a secure investment vehicle. Options A, C, and D fail to address the fundamental reasons for investing in Treasury bonds, emphasizing either incorrect concepts or secondary features rather than the core appeal of safety and reliability.