Question 74

Government backing and low risk

Firms with extra cash find Treasury bonds attractive due to their government backing and low risk. This security makes Treasury bonds a safe investment option compared to other financial instruments.

A) Ownership in the government

This option is incorrect as Treasury bonds do not grant ownership in the government. Instead, they are debt securities issued by the government, which means investors lend money to the government in exchange for interest payments and the return of principal at maturity.

B) Government backing and low risk

This option is correct because Treasury bonds are backed by the full faith and credit of the U.S. government, making them one of the safest investments available. Their low risk is a primary reason why firms with extra cash choose to invest in them, providing a stable return without the volatility associated with other investment vehicles.

C) High returns with high risk

This option is incorrect. Treasury bonds are known for their low risk, which typically correlates with lower returns compared to more volatile investments. Firms seeking high returns usually look towards riskier assets, which do not apply to Treasury bonds.

D) Daily liquidity

While Treasury bonds can be traded in secondary markets, this option is not the primary reason firms invest in them. Daily liquidity is a feature, but it is the government backing and low risk that primarily attract firms with extra cash.

Conclusion

Treasury bonds are particularly appealing to firms with extra cash due to their government backing and the associated low risk, which provides a secure investment avenue. Other options fail to capture the essence of what makes these bonds attractive, as they either misrepresent their characteristics or focus on less relevant aspects of the investment.