Final answer:
Short-term paper investments are ideal for entities with excess cash and include options such as Government Savings Bonds, Money Market Mutual Funds, and Small CDs. These instruments offer flexibility and are typically less risky, making them suitable for managing short-term liquidity.
Step-by-step explanation:
Short-term paper investments are financial instruments that are often used by entities when they have cash exceeding their immediate needs. These are ideal for managing surplus liquidity and often come with a maturity period of less than one year. Some common types of short-term paper investments include:
Government Savings Bonds: Low-risk investments backed by the trustworthiness of the government.
Money Market Mutual Funds: Funds that invest in short-term, high-credit-quality securities.
Small Certificates of Deposit (CDs): Offered by banks, they provide fixed interest rates for a specified term.
When an entity, like a firm, has extra cash, they can choose several investment strategies to ensure that their money does not remain idle.
Apart from these short-term options, firms may also engage in reinvesting profits, seeking early-stage investors, borrowing through banks or bonds, or selling stock to raise financial capital for larger and longer-term projects.