Investment Options for Temporarily Idle Cash

C

When considering an investment for temporarily idle cash that will be used to pay quarterly dividends three months from now, the primary focus should be on the investment's safety and liquidity. The investment should be safe, which means the likelihood of losing principal should be low, and it should also be liquid, meaning it can be easily converted to cash when needed.

Given these considerations, option C, which is a 90-day commercial paper with a current annual yield of 6.2 percent, would be the most appropriate investment choice. Commercial paper is a short-term, unsecured promissory note issued by a corporation and is generally considered a safe investment. Moreover, it has a maturity that matches the investment horizon and liquidity needs of the investor. Additionally, it provides a higher yield than cash equivalents, such as treasury bills and money market funds, while also offering a higher level of safety than options like common stocks.

Options A, B, and D, are not suitable for this purpose because they have long-term maturities, which means they may not be as liquid, and the risk of losing principal due to interest rate fluctuations is higher. Option A is a long-term Aaa-rated corporate bond with a current annual yield of 9.4 percent, which is attractive for long-term investments. However, it's not suitable for a three-month investment horizon. Similarly, option B is a 30-year Treasury bond with a current annual yield of 8.7 percent, which also has a long-term maturity, making it unsuitable for a three-month investment horizon. Option D is common stock that has been appreciating in price 8 percent annually, on average, and paying a quarterly dividend that is the equivalent of a 5 percent annual yield. While it may be an attractive investment for long-term growth, it carries a higher risk of principal loss and is not as liquid as commercial paper.

In summary, when investing temporarily idle cash that will be used to pay quarterly dividends three months from now, the most appropriate investment choice is a 90-day commercial paper with a current annual yield of 6.2 percent.