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Terms in this set (47)
The document specifying a company's posture toward risk and return and how it is to be implemented is called a (an)
What is the correct ranking of investment guidelines for short-term investment portfolios (most important to least important)?
safety, liquidity, yield
Why is an analysis of the pattern and variability of the investing company's cash flows so important as part of the short-term investment process?
it guides dollar amounts and maturities of investments
Why should the investment officer be concerned about the loan covenants on the company's loans?
they may prohibit certain types and/or amounts of investments
Compared to investing with a securities brokerage, an advantage of investing surplus funds with the company's bank(s) is
all of the above
For a small business, a major advantage of investing surplus funds in a money market mutual fund is
Why do short-term investors seek to invest in the largest possible denominations, given the amount of money they have to invest?
because these securities offer higher yields
"Riding the yield curve" involves
buying securities with maturities greater than the investment horizon, fully intending to liquidate them prior to maturity
Which of the following is NOT considered to be a passive investment strategy:
Historical yield spread analysis
The money market is mainly a (an) ___________ market.
The most liquid security, and the one that has the least default risk in the world, is the:
Relative to treasury securities, agency securities have __________ liquidity and ___________ default risk.
Which of the following is not one of the advantages of money market mutual funds?
exemption from state and local income taxes
Which of the following will enhance the return associated with a dividend capture short-term investment strategy?
all the above are correct
Security A is a fully taxable security that earns 5% annually. Security B is a tax-exempt municipal security. If a short-term investment manager uses a tax rate of 33%, what yield must security B earn such that the investment manager would be indifferent between securities A and B?
5% x (1-0.33) = 3.35%
An instrument will normally be quite liquid if it has high degrees of _______ market ____________.
The _______ is the rate charged depository institutions when they borrow reserves from the Fed; the _______ is the rate charged on reserve borrowings transacted between banks.
Discount rate, Fed funds rate
Short-term borrowing differs from spontaneous sources in each of the following ways EXCEPT:
short-term borrowing is an indirect way of getting funds
The conservative financing strategy:
Uses only long-term funds
A "clean up" period is:
a period of time over which a company reduces its outstanding balances to zero on order to demonstrate has not become permanent capital
A retailer makes a sale for which the customer pays via a credit card. From the perspective of the retailer, the sale is an example of using:
Without recourse factoring
The Brooks Company paid total interest of $3,000 on its line of credit borrowings for the year. Also, Brooks paid a $50 commitment fee and borrowed on average $30,000 for the year. Of the $30,000 average borrowings, $6,000 remained in the bank as a compensating balance. What is the Brook's annual effective rate of interest?
= ($3000 + $50)/($30000 - $6000) = 12.71%
The maximum reliance on short-term financing is found in the ______ financing strategy.
The minimum level of ongoing inventory and receivables is what is referred to as ______________ current assets.
A company is experiencing rapid build-up in its inventories and receivables. A potential cause(s) for this include:
I. Sales are declining significantly
II. Inefficient inventory and receivable management
III. It has moved to just-in-time inventory management and shortened its credit period
IV. Sales are growing rapidly
II and IV
The ______ the liquidity buffer that a treasurer decides to implement when establishing a line of credit, ___________ the effective cost of the credit line.
larger, the higher
The aggressive financing strategy:
Is basically a maturity matching strategy & Heavily relies on short-term funds
The ABC Company paid total interest of $2,000 on its line of credit borrowings for the year. ABC paid a $100 commitment fee on an average borrowing of $20,000 for the year. What is ABC's annual effective rate of interest?
($2000 + $100)/($20000) = 10.50%
MNO, Inc. paid interest of $3,000 on its line of credit borrowings for the year. MNO's average annual borrowings are $30,000. The bank retains $6,000 as a compensating balance. What is the MNO's annual effective rate of interest?
($3000 + $0)/($30000 - $6000) = 12.5%
The unused portion of a firm's credit line is usually discussed in which part of the annual financial statement?
Sources of liquidity section
The primary difference between an entity trying to hedge interest rate risk versus a speculator in that same financial futures contract is that the hedger is
trying to protect a present or anticipated cash position
The three cash flows involved in a currency swap are the initial exchange of principal amounts, the final exchange (or re-exchange) of principal amounts, and
the exchange of interest payments over the course of the borrowings
A futures trader anticipates that interest rates will rise more than what the financial markets expect. He would profit by
sell a contract now, and buy it back after the rates rise
When buying or selling a futures contract, the trader commits what amount of funds?
the amount of the initial margin
With futures contracts, a trader's position is "marked to market" daily. This means that an investor who bought a Treasury bill futures contract will end up with what change in account value if interest rates drop on a given day?
the trader's account will increase in value
The financial manager that will have surplus funds to invest in two months, and wants to eliminate the uncertainty of the interest rate at which the funds will be invested, would engage in a
An investor in Treasury bills cannot find a Treasury bill futures contract, which matches his maturity date, and selects a Eurodollar futures contract instead. This is called a
A company wishes to hedge a cash position with an interest rate futures contract. To do so effectively, the maturities of the cash and futures instruments should be the same, or
the number of futures contracts can be adjusted to equal the dollar price change per basis point
If using a Treasury bill futures contract to offset a commercial paper position, the financial manager should ensure that
the movement in Treasury bill rates and commercial paper rates are closely correlated
A perfect hedge is one in which
the gain on the cash position is exactly offset by the loss related to the futures contract
From the corporate financial manager's perspective, the most important difference between a futures option and a futures contract is that
the option limits the loss exposure to the option premium
A US multinational anticipates a large sale to a British importer. While the price of the goods is set, the importer may choose to purchase them from another source. The terms of sale are net 90. If the British pound is depreciating relative to the dollar, which of the following would be the best way to hedge the transaction risk associated with the depreciating pound?
purchase a currency put option
A British Pound futures contract is for 62,500 pounds. The futures exchange rate today on the pound is $1.51 and will be $1.55 in 60 days. If you purchase the contract today to hedge a British pound liability due in 60 days, how much would you gain (lose) on the contract?
$1.55 - $1.51 = $0.04 gain per British Pound
Contract gain = 62500 x 0.04 = $2500
An interest rate collar has a cap strike rate of 10.00% and a floor strike rate of 9.50%. If the reference interest rate moves from 9.50% to 9.75%, what is the effective rate of the collar?
Key rules forming the backbone of Regulation FAS 133 include:
Companies must fully describe their hedging activities & The amount by which a hedge is not perfect must be reported on the income statement
Interest rate caps are marketed by:
Based on the Treasury & Risk Management's 2001 Derivatives Survey, the majority of the respondents favored:
Interest rate swaps
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