Question

suppose that the interest rate on treasury bills is 6% and every sale of bills costs 20. You pay out a cash at a rate of 400,000 a month. According to Baumol's model of cash balances, how many times should you sell bills?

Answer 1

Answer: 7times

Explanation:

Answer 2

According to Baumol's model of cash balances, how many times should you sell bills is 25 times.

What is Baumol's model of cash balances?

Baumol's model of cash balances is a theory developed by William Baumol. The model is used to determine the optimum amount of cash transactions that can be carried out when there is certainty.

Number of times the bills should be sold = rate at which cash is paid monthly / optimum level cash transaction

Optimum level of cash transaction = √(2 x F x T) / i

Where:

• F = the fixed cost of a transaction
• T = the total cash needed for the time period involved
• i = the interest rate on marketable securities

√(2 x 20 x 400,000) / 0.06 = 16,329.93

Number of times the bills should be sold =  400,000 / 16,329.93 = 25

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