Emphasized Concepts - Questions

Question 1

Which security best allows an issuing company to obtain additional funding while keeping debt costs low?

A. Depositary Receipts
B. Preferred Stock
C. Convertibles
D. Warrants

Answer 1

D.

Key phrases here include:
**additional funding
**keeping debt costs low

Issuing preferred stock is similar to issuing debt, so it’s not the best answer

Warrants have the ability to bring additional funds into a company while keeping debt costs low

Question 2

What did the Financial Stability Board (FSB) publish proposals for in October 2021?

Answer 2

Enhance money market fund resilience

Question 3

Factoring vs. Securitization

Answer 3

Securitization is for bundling obligations for investors, rather than a factor

Factored A/R is often sold at a steep discount

Question 4

Financial Statements are used by the board and executive leadership to accomplish which of the following?

A. Assess creditworthiness
B. Assess performance against loan covenants
C. Reward staff
D. Determine whether or not to invest

Answer 4

C - Reward staff

Question 5

Lenders, creditors and investors usually pay additional attention to which of the following financial statements?

A.Statement of cash flows
B.Balance sheet
C.Statement of retained earnings
D.Income statement

Answer 5

A - Statement of cash flows

Question 6

A subsidiary of a US company based in China keeps its books in the Chinese renminbi and does the majority of its business in the Chinese renminbi (RMB). The home currency is the US dollar (USD). According to IAS 21: The Effects of Changes in FX Rates, during the step where one translates foreign currency financial statements into the functional currency, non-monetary items that are reported at historical cost in RMB ______________.

A.Are translated into USD using the exchange rate on the transaction date
B.Do not need to be translated in this step as they are already in the functional currency
C.Are translated into USD using the closing exchange rate
D.Are translated into USD using the exchange rate as of the date of the fair value measurement

Answer 6

B - Do not need to be translated in this step as they are already in the functional currency

Question 7

Which of the following uses of cash would not allow the time value of money to be effective?

A.Investing in equipment that will have 100% idle capacity
B.Repaying debts
C.Investing in short-term commercial paper
D.Selling zero coupon bonds

Answer 7

A - Investing in equipment that will have 100% idle capacity

Question 8

A firm’s weighted average cost of capital is 7%, it has achieved a return on total assets of 6% and net income of $400,000. The company also has positive cash flow. Which of the following is the MOST LIKELY result of this scenario?

A.The firm is creating only a small amount of value for investors, so the stock price will likely not be affected by the results either way
B.The firm has seen mixed success and the stock price will likely stay the same
C.The firm is successful by all measurements given and the stock price will likely rise
D.The firm is destroying some of the stock's value and the stock price will likely fall

Answer 8

D - Even with net income and positive cash flow, the stock price will decrease

Question 9

What responsibility do treasury professionals typically have in regards to budgets?

A.Treasury professionals use budgets primarily for planning and variance analysis
B.Treasury professionals need to assess the impact budgets have on debt covenants but not credit ratings
C.Treasury professionals use budgets as an input to their work but are not responsible for the budgeting process
D.Budgets may require treasury professionals to change how they handle short-term assets to maintain overall liquidity

Answer 9

D - Treasury assess for impacts on debt covenants and credit ratings

Question 10

Which of the following statements is true regarding free cash flow (FCF)?

A.It is not considered a fundamental component of assessing firm value
B.It must be a positive number for it to be interpreted positively by investors
C.It indicates how much cash generated during the period is available to shareholders and creditors
D.It adjusts net income for cash charges, working capital and capital expenditures

Answer 10

C - FCF is for shareholders and all creditors

Question 11

Labor is the greatest variable cost for a particular business. Equipment is the greatest fixed cost for the business. Which of the following should the business do if they wish their profits to expand more rapidly, assuming the company is currently profitable? What will happen to the break-even level of output for the business if they make the change?
1. A.Invest in labor to reduce equipment costs; the break-even level will increase
2. B.Invest in equipment to reduce labor costs; the break-even level will decrease
3. C.Invest in labor to reduce equipment costs; the break-even level will decrease
4. D.Invest in equipment to reduce labor costs; the break-even level will increase

Answer 11

D - Profits will expand more rapidly using fixed costs once those costs have been covered. As the company is already profitable, investing in more fixed costs will create a higher level of profitability.

Question 12

A firm has increased its return on assets (ROA) from the prior period. The firm’s return on sales increased significantly and its total asset turnover decreased a fair amount over the period. Which of the following is the correct conclusion from these results?
1. A.The firm should look for areas where their investment in assets could be reduced to increase measures such as cash turnover
2. B.All of the ratios mentioned show that both efficiency and effectiveness have increased regarding cost control and asset usage
3. C.The firm should increase control over operating costs by increasing its investment in fixed assets relative to current assets
4. D.The firm should focus on measures such as gross and operating profit margin as a means to increase total asset turnover

Answer 12

A

ROA measures net income in relation to the investment in assets. A greater value for this ratio implies a larger net income generated per dollar invested in assets.

The net profit margin, also known as return on sales, shows the percentage of profits earned after all expenses and taxes are deducted from revenues.

Total asset turnover measures how many times the firm’s asset base was used or turned over while generating the period’s revenue. This is a measure of how effectively assets are used to generate revenue. If total asset turnover was too low, then the firm had more investment in assets than a well-managed firm needed to support the experienced revenues.

Question 13

To optimize float, a company who is investing heavily in just-in-time and supply chain management would disburse and collect in which of the following ways?
1. A.Use electronic payments, invoices, and collections
2. B.Disburse via check; collect via electronic invoices and ACH
3. C.Disburse via wire; collect via paper invoices and ACH
4. D.Disburse and collect using checks and paper invoices

Answer 13

A - Traditionally, the rule in cash management has been to collect quickly and disburse slowly, within the constraints of prudent business practices and the maintenance of good relations with trading partners and other stakeholders. Suppliers have an incentive to engage in actions that minimize the company’s payment float, while customers try to maximize the company’s collection float. The introduction of electronic payment systems, including commercial cards, has changed the relative incentives to an extent because the efficiency and benefits of the new payment methods (including the reduction in processing costs) outweigh the benefits of delaying paper-based payments, resulting in quicker disbursements.

Question 14

Why is careful management of borrowing and investing during the cash cycle critical to a company’s short-term liquidity and long-term viability?
1. A.Investing generates sufficient inventory cushions and borrowing compensates for accounts receivable delays
2. B.The cycle of purchasing, building, selling and collecting is predictable but has inherent time lag
3. C.While the cash flow cycle is often stable, it cannot grow without continual capital investments
4. D.Cash flow is often uneven for individual accounts and overall working capital

Answer 14

D - Many current asset and current liability accounts vary whenever sales activity occurs. These accounts are called spontaneous because no specific working capital management decisions are involved in increasing these accounts. Changes in account levels occur as account activity fluctuates with a change in the level of sales activity. The magnitude of spontaneous changes significantly impacts the amount of external financing necessary for working capital.

Question 15

A company’s credit terms, sales and collection patterns are a determinant of its level of which of the following?
1. A.Permanent versus fluctuating current assets
2. B.Accounts receivable
3. C.Credit risk
4. D.Working capital

Answer 15

Answer is B

A firm’s credit terms, sales, and collection patterns determine its level of accounts receivable (A/R). Since A/R must be financed, a firm’s ability to extend credit relates directly to its ability to borrow.

Question 16

When credit scoring is used to analyze the creditworthiness of an applicant, what is the correct chronological sequence for the following steps?
1. Setting of cutoff scores for clear approval or denial of credit
2. Differentiating standard and high-risk accounts based on the applicant’s monthly income, outstanding obligations, and employment history
3. Weighting the characteristics of applicants that fit into each category to establish creditworthiness
________________________________________
1. A.I, II, III
2. B.II, I, III
3. C.II, III, I
4. D.III, II, I

Answer 16

Answer is C

Question 17

When assessing the costs of offering trade credit, what is the primary cost to weigh against the cost of bad debt?
1. A.A carrying cost of short-term borrowings
2. B.A discount offer that results in a general increase in sales
3. C.Determining dynamic discounting and benchmark eligibility
4. D.Payment delays resulting from disputed invoices

Answer 17

Answer is A

There are costs associated with offering trade credit. On the expense side, the primary costs of A/R are carrying costs. This cost is typically the short-term borrowing cost or the weighted average cost of capital (WACC).

Question 18

A just-in-time (JIT) system can help a company fulfill all of the following goals EXCEPT which?
1. A.Reduce risk of back orders
2. B.Improve inventory planning
3. C.Balance production processes
4. D.Improve supplier quality

Answer 18

Answer is A

Keeping minimal inventory levels will not reduce the risk of backorders.

Question 19

A netting system can be used for all of the following transactions EXCEPT which?
1. A.Intercompany transactions
2. B.International external purchase transactions
3. C.Domestic third-party payments or receipts
4. D.Foreign exchange settlements

Answer 19

Answer is B

Multilateral netting is used primarily for intercompany transactions between subsidiaries, but some firm’s netting processes also include third-party payments and receipts.

Question 20

Which of the following reflects a win-win approach to improving cash flow?
1. A.Focus on the end of the operating cycle (sale of goods or services through collection of sales receipts)
2. B.Shortening all types of float associated with paper-based collections
3. C.Lengthening all types of float associated with paper-based disbursements
4. D.Focus on the beginning of the operating cycle (purchase of resources through sale of goods or services)

Answer 20

Answer is D

In many industries, companies are taking a win-win approach by establishing strategic partner relationships with both suppliers and customers. In these industries, the focus has shifted away from the end of the operating cycle and toward the beginning of the operating cycle (purchase of resources through sale of goods or services). In other words, the focus has shifted to the areas that represent the greatest possible gains in reducing cycle time, such as just-in-time (JIT) inventory and supply chain management.

Question 21

A manufacturing company wants to determine their days’ inventory using data from the past three quarters. Raw materials remained in inventory for 26 days in the first quarter, 35 days in the second and 32 days in the third. The conversion process from raw to finished goods ran 12, 17, and 16 days respectively. The finished goods remained in inventory for 30, 20, and 34 days respectively. Which of the following correctly calculates days’ inventory?
1. A.43 days
2. B.46 days
3. C.74 days
4. D.222 days

Answer 21

Answer is C

Take an average of each component

Question 22

To reduce invoice float, what is a critical factor when issuing invoices to your customer who utilizes “auto-match” processes to perform a three-way match prior to authorizing payment of an invoice?
1. A.Summary statements of outstanding invoices
2. B.Clearly stated payment terms and remittance instructions
3. C.Phone call to the customer after sending invoice
4. D.Fast invoice transmission to minimize invoicing float

Answer 22

Answer is B

Effective A/R management includes reducing invoicing float, which is the interval between the time goods and services are sold to a customer and the time that a customer receives an invoice. The first step in collecting an account is sending accurate and timely invoices with clearly stated payment terms and remittance instructions.

Delays in invoice preparation or errors on an invoice may extend the payment process. This is particularly an issue with customers that use “auto-match” processes that validate invoices against purchase orders and receiving statements (referred to as a three-way match) to authorize payment of invoices. Minor errors in an invoice can lead to lengthy delays in payment as a result.

Question 23

When working capital decreases, why would net income increase?

Answer 23

Interest expense for financing the working capital would decrease

Question 24

For those vendors that use three-way match or “auto-match” processes, what is the best strategy to reduce invoice float?

Answer 24

Ensure invoices contain clearly stated payment terms and remittance instructions

Question 25

What is the win-win approach for reducing float?

Answer 25

Instead of focusing on the end of the operating cycle (sale of goods through collection), companies are now shifting focus on the beginning of the process (purchase of resources through sale of goods) as this provides focus on the areas that would contribute to the greatest cycle reduction times JIT technique and supply chain management are examples of this

Question 26

Sellers offer trade credit (cash) discounts in order to primarily accomplish which goal? 1. A.Remain competitive in the market 2. B.Increase revenue per dollar of sales 3. C.Increase working capital 4. D.Increase financial leverage

Answer 26

Sellers offer trade credit (cash) discounts to encourage their customers to speed up payments or to remain competitive in the market

Question 27

A company has the following accounts receivable (A/R) balance pattern: * 80% sales from current month * 55% sales from 1 month prior * 40% sales from 2 months prior * 10% sales from 3 months prior * 0% sales from 4 months prior Their sales for the first half of the year are as follows: * January: $17,000 * February: $21,000 * March: $23,000 * April: $22,000 * May: $22,000 * June: $12,000 A treasury professional is asked to estimate incoming cash flow for the month of June. What is the estimated cash collection for June? (Rounded to the nearest whole dollar)

Answer 27

Answer is A. The A/R Balance pattern shows the BALANCE OF A/R, not the amount collected. Calculate the difference between the balance percentages to determine how much is collected in each month.

Question 28

A company using positive pay wants to improve its speed of response and the accuracy of the positive pay method. Which of the following would allow the treasury professional to make these critical pay/no-pay decisions in the MOST timely manner? A.Imaging services B.Photocopies of checks C.Purchasing cards D.Full reconciliation

Answer 28

Answer is A Photocopies are physical copies

Question 29

# Confusing question from Discussion Questions from Chapter 10 Which procure-to-pay step initiates the inventory period and which order-to-cash step ends it? 1. Send and receive PO 2. Ship and receive goods and invoice 3. Send and receive payment 4. Reconcile and account

Answer 29

C - See chart on page 309

Question 30

Which of the following is the LEAST important factor to a company that is selecting a lockbox bank? A.Balance reporting capabilities B.Proximity to the company C.Location of customers making the largest check payments D.Availability schedule offered

Answer 30

Answer is B Proximity to the company is not relevant for lockbox decisions. Balance reporting, remittance data availability, location of customers making the largest check payments, and the availability would all be important considerations

Question 31

The primary objective of a collection study for lockbox selection purposes is to determine the most cost-effective collection system for a company on the basis of what? A. Banking structure B. Credit terms C. Remittance data characteristics D. Computer capabilities

Answer 31

Answer is C A collection study uses data from remittance envelopes and images of checks to obtain information, such as the location and geographic concentration of customers and the location of the customers making the largest check payments.

Question 32

A company with high transaction volume for their collections of checks, which they can convert using remote deposit capture, is deciding whether to use an in-house processing center or a lockbox. Which of the following could be a disadvantage if they use a lockbox instead of a company processing center? A. Harder to scale up or down B. Greater costs C. More vulnerable to service interruptions D. Decreased clarity for external auditors

Answer 32

Answer is B Lockboxes increase clarity for external auditors because it segregates the controls between depositing cash and the rest of the A/R function

Question 33

Using a letter of credit may result in which of the following? A. Diversification B. Collateralization C. Credit rating substitution D. Reduced marketability

Answer 33

Answer is C A letter of credit is a document issued by a bank, guaranteeing the payment of a customer’s draft up to a stated amount for a specified period, provided certain conditions are met. The L/C substitutes a bank’s credit for that of the buyer, substantially reducing the credit risk to the seller.

Question 34

For what reason is an electronic lockbox referred to as a lockbox? A. It shares many of the reporting features of a traditional lockbox B. It processes incoming mail payments and converts them to electronic payments C. It handles both incoming mail and electronic payments such as ACH D. It provides receivables matching against a company's open invoices

Answer 34

Answer is A The increased volume of electronic remittance payments spurred the creation of an electronic lockbox. This service combines and presents remittance information from electronic payments. While this service is not literally a lockbox since there is no actual mail involved, it does have many of the reporting features traditionally associated with lockbox processing.

Question 35

The Uniform Customs and Practices for Documentary Credits (2007 Revision), International Chamber of Commerce rule UCP 600 created which of the following rules for letters of credit (L/Cs)? A. Sets an absolute deadline of five banking days to review L/C documents and pay or decline a draw B. Requires that the advising/negotiating bank add confirmation to an L/C C. Makes L/Cs irrevocable, meaning the L/C cannot be canceled or amended without the agreement of all involved parties D. Allows U.S. banks to issue formal payment guarantees

Answer 35

Answer is A The current rules are outlined under UCP 600, and these rules affect almost every credit issued under the ICC’s UCP. Most notably, UCP 600 establishes an absolute deadline of five banking days to review documents and determine whether to pay or decline a draw.

Question 36

The Electronic Federal Tax Payment System (EFTPS) is used for collecting which of the following types of tax deposits? Corporate business Corporate excise Employee salary and wage A. I, II and III B. III only C. I and II only D. I and III only

Answer 36

Answer is A EFTPS is the primary method for collecting and accounting for federal taxes withheld by employers from individuals' salaries and wages, as well as corporate business, sales and excise taxes.

Question 37

A bank issues a negotiable short-term instrument to finance the import of goods for a company. This instrument requires that the bank take responsibility for paying a draft issued in connection with a letter of credit. What type of trade service is being offered? A. Documentary collection B. Letter of credit confirmation C. Commercial paper D. Banker's acceptance

Answer 37

Answer is D A banker's acceptance (BA) can be used to finance the import, export, or domestic shipment of goods, as well as the storage of properly titled goods. BAs are used frequently in conjunction with L/Cs requiring a time draft drawn on a bank. A BA is created when one company signs an unconditional written order directing a bank to pay a certain sum of money on demand or at a definite time to another company, usually to finance the shipment or temporary storage of goods. **The unconditional written order, also known as a time draft, is stamped as accepted by the bank.** By accepting the draft, the bank agrees to pay the face value of the obligation if the buyer (i.e., the issuer that drew the draft) fails to make payment. Since the accepting bank assumes the risk of the buyer defaulting, it makes it easier for the buyer or seller to undertake international trade.

Question 38

If the confirming bank in a letter of credit (L/C) confirms the line by committing to the exporter that payment will be made if documents meet the terms and conditions of the L/C, regardless of the issuing bank's ability to pay, what role does the confirming bank also take on? A. Issuing bank B. Negotiating bank C. Advising bank D. No other role, this is the function of the confirming bank

Answer 38

Answer is B If requested, the advising/negotiating bank may add confirmation, as the confirming bank, to an L/C. In doing so, the confirming bank commits to the exporter that payment will be made if documents meet the terms and conditions of the L/C, regardless of the issuing bank’s ability to pay. If an L/C is confirmed, the confirming bank will be the negotiating bank as well.

Question 39

Which of the following can a retailer with geographically disparate locations use to reduce availability float for cash and reduce the cost of security? A. Remote deposit capture (RDC) B. Smart safe C. Lockbox D. Physical pooling

Answer 39

Answer is B Smart safes provide the ability for a bank to service retail outlets that are not near any of its branches.

Question 40

When compared to an in-house payables operation, a comprehensive payables service has the potential of reducing which of the following? A. Disbursement control risks B. The number of cross-border payments C. Bank service charges D. Late payments

Answer 40

Answer is A Outsourcing disbursements is quite common because of the complexities of many payments types and the need for extensive controls over disbursement activities.

Question 41

A banker's acceptance (BA) is created when a bank accepts payment responsibility for which of the following? A. Repurchase agreement B. Trade credit C. Draft D. Commercial paper (CP)

Answer 41

Answer is C The unconditional written order, also known as a time draft, is stamped as accepted by the bank.

Question 42

An interest rate exposure horizon for an investment policy is a function of the total interest rate exposure already present and which of the following? A. The organization's outsourced investment management B. The expected current equity market return C. Organization's risk philosophy D. Organization's capital structure

Answer 42

Answer is C An investment policy should specify any limitations that a firm may have regarding the maximum and average duration of the investments in its portfolio. This exposure horizon is a function of both the organization’s risk philosophy and the total interest rate exposure already present in other areas of the organization.

Question 43

An organization contracts with an outside investment firm to manage its short-term investment portfolio and provide securities custody services. This type of custody arrangement can be offered at low or no cost, making it attractive. However, what is the primary downside of this arrangement? A. Typically entails additional reinvestment risk B. May create an unacceptable fraud risk C. May restrict the ability to quickly liquidate securities due to the limited number of trading partners D. Restricts the timing of consolidated reporting

Answer 43

Answer is B An alternative to fee-based, third-party custodians is to keep securities at the institution (usually a brokerage firm) from which they were purchased. This method affords all the same support as with a custodian bank, but such custody services are normally offered at no charge, which may be attractive to smaller organizations. This approach is considered somewhat more risky because there may be a potential for fraud, as the custodian is supposed to be the third-party control in the process.

Question 44

A treasury manager is comparing two investments. Investment A is a 91-day $100,000 negotiable CD with a holding period yield of 2.4%. Investment B is a 10-year $100,000 debenture with a bond equivalent yield of 9.1%. Assuming Investment B is to be sold after 91 days, calculate the holding period yield for holding Investment B. What is the holding period yield for the investment with the higher holding period yield? (Rounded to the nearest tenth of a percent) A. 2.3% B. 2.4% C. 0.6% D. 9.2%

Answer 44

Answer is B The holding period yield for Investment B can be calculated by reordering the bond equivalent yield formula as follows: Bond Equivalent Yield = Holding Period Yield × (365 ÷ Days to Maturity) Holding Period Yield = Bond Equivalent Yield × (Days to Maturity ÷ 365) Holding Period YieldB = 0.091 × (91 ÷ 365) = 2.3% The holding period yield was given for Investment A, so the two can now be compared: Holding Period YieldA: 2.4% Holding Period YieldB: 2.3% The holding period yield of higher yielding investment is 2.4%.

Question 45

Company A has a $200 Million-dollar revolving line of credit. Due to the size of the line, the facility has been syndicated between four financial institutions. One of the lending institutions has changed its risk scoring for Company A and wishes to exit the syndicate, how does this request work and what is the result of this action on the credit line? A. The lender must seek the permission of the syndicate and borrower in order to leave the syndicate, the line will be reduced once the lender leaves B. The borrower can block the the lender from leaving the syndicate until the next renewal period, there is no impact to the line C. The lender is able to sell their shares without the consent of the borrower, the line is unaffected D. The lender can leave with 120 day notice, the syndicated line limit will be reduced by that lenders share of the credit line

Answer 45

Answer is C In a loan syndication, multiple financial institutions share the funding of a single credit facility. The syndicate, or group of lenders, is led by an agent who acts as the intermediary between the firm and the syndicate to negotiate credit terms and documentation, make advances and collect payments on the loan, and disseminate information. The agent usually receives an annual fee for handling these tasks. All syndicate members share common documentation, but each lender has a promissory note, making it a direct lending relationship. ***The individual lenders in the syndicate are usually able to sell their shares with or without consent from the borrower, depending on the terms of the contract.***

Question 46

A corporation is planning to access the debt market next year and currently has a credit rating of Ba1 (Moody's) and BB+ (S&P). Which qualitative factor might the company stress in its upcoming reviews with the credit agencies to hopefully achieve investment grade ratings? A. The company's internal projections project that its leverage ratio will decrease to 2.0 consistent with investment grade ratings B. The company plans to enter into labor negotiations with its union this fall as the prior 5-year agreement is expiring at the end of next year C. A long-standing SEC investigation into the company was recently completed with no action being recommend against the company D. The new political administration is targeting additional regulations for the company's industry

Answer 46

Answer is C For issuers, the ratings process includes the quantitative and qualitative analyses of the issuer being assessed. The quantitative aspects focus mainly on financial analyses derived from the issuer’s financial reports. In most cases, credit rating analysts examine the issuer’s financial statements using proprietary models and may perform additional quantitative reviews if necessary. The **qualitative side** is concerned with aspects that are distinct from the financial statements. For a corporate issuer, this may include analyzing the quality of the management and the firm’s competitiveness within its industry, as well as the expected growth of the industry and its vulnerability to business cycles, technology changes, regulatory changes, and labor relations.

Question 47

A corporation's long-term bond credit rating from Moody's changed from to Ba1 to Baa3, what is the most likely impact of this change? A. Funds are more likely to be raised via equity instead of debt B. Minimal impact C. Decrease in borrowing costs D. Increase in borrowing costs

Answer 47

Answer is C The distinction between investment and non-investment (speculative or, sometimes, junk) grade ratings is important, especially for issuers either just above or just below the boundary. An issuer whose rating falls from an investment to a non-investment grade can experience an increase in borrowing costs. For example, many short-term investment policies specify that only investment grade instruments can be purchased, which means that a downgraded commercial paper program may be difficult to roll over.

Question 48

Which of the following provides a tangible economic benefit because it is a way to avoid incurring debt or liquidating investments? A. Zero coupon bonds B. Trade credit C. Arbitrage D. Internal factoring

Answer 48

Answer is B Trade credit provides a tangible economic benefit as a source of financing because the buyer may avoid liquidating investments or incurring debt over the credit period.

Question 49

A Chinese investor invests in U.S. Treasury bills. If the Chinese renminbi (RMB) appreciates during the holding period against the U.S. dollar (USD), and the investor did not hedge the investment, then which of the following statements would be true? A. The investment increases in value but default risk remains unchanged B. The investment declines in value and decreases in default risk C. The investment increases in value and decreases in default risk D. The investment declines in value but default risk remains unchanged

Answer 49

Answer is D FX risk arises when investors purchase securities denominated in foreign currencies. An adverse change in the FX rate can result in a lower rate of return when the proceeds from the investment are converted to the firm's home currency. If the foreign currency depreciates relative to the investor's local currency, then the value of the investment declines. Since the RMB appreciates relative to the USD, the USD depreciates relative to the RMB. Due to a perception of low liquidity and low default risk, US treasuries are generally considered risk-free and serve as the benchmark against which interest rates on other debt securities are compared.

Question 50

How often are ratings usually reviewed by CRAs? A. Quarterly B. Annually C. Monthly D. As needed

Answer 50

Answer is B Ratings usually are reviewed by the CRAs once a year based on new financial reports, new business information, or review meetings with management.

Question 51

The all-in rate consists of a base rate. Which of the following can this base rate be? 1. Secured overnight financing rate (SOFR) 2. Prime rate 3. Fed funds rate 4. Eurobond rate A. I and II only B. I, II and III only C. I, III and IV only D. I, II, III and IV

Answer 51

Answer is B Eurobond rate is not a base rate.

Question 52

Under the percentage-of-sales method, which pro forma balance sheet item is typically forecasted as a percentage of sales from the pro forma income statement? A. Net fixed assets B. Notes payable C. Inventory D. Cash and cash equivalents

Answer 52

Answer is C A common approach used to construct pro forma financial statements is based on the percentage-of-sales method. The percentage-of-sales method involves projecting the income statement items as a percentage of sales. Likewise, certain items on the balance sheet, such as inventory, A/R, and A/P, are also projected as a percentage of sales. These percentages are then used in conjunction with the forecasted sales level to produce a forecasted income statement, balance sheet, and statement of cash flows.

Question 53

What is the most important requirement when completing a cash flow forecast? A. Disclose assumptions B. Use the appropriate platform C. Use appropriate detail D. Invest the appropriate amount of resources

Answer 53

Answer is C Perhaps the most important requirement is to make sure positions are forecasted in sufficient detail to meet the firm’s requirements. If the forecast is to be used to determine whether there is sufficient cash to meet obligations in different currencies, positions need to be forecasted in each of those currencies. On the other hand, if the forecast is used to manage the firm’s surplus balances, aggregated forecasts may be sufficient, even if this means that some funds sit idle in bank accounts overnight.

Question 54

Which of the following is one of the five steps a treasury professional should take when building a cash flow forecast? A. Adjust available balances by the day's anticipated cash inflows and outflows B. Match current assets to current liabilities C. Sum available balances in the company's bank accounts D. Generate a pro forma cash position

Answer 54

Answer is D Cash flow forecasting requires a treasury professional to take five essential steps: 1. Establish assumptions, including by leveraging historical information, if available 2. Estimate future cash inflows and outflows 3. Generate a pro forma cash position 4. Identify how to finance cash deficits or invest cash surpluses. The shortfall or surplus is measured relative to the predetermined, minimum desired target cash balance 5. Review the forecast against actual results, and revise the forecasting process as necessary

Question 55

Which of the following is an advantage of using regression analysis in a distribution forecast? A. It improves the accuracy of medium- to long-term forecasts B. It can accurately predict changes in trend C. It considers the historical relationship between sales and balance sheet items D. It does not require large amounts of data

Answer 55

Answer is B Correlation analysis involves identifying the degree of association between two variables. Understanding the variables that are strongly correlated with cash flow is important as these variables can be used to produce future cash forecasts. For example, there is usually a strong positive correlation between a firm's sales and its cash flows. Once a correlation or relationship between cash flow and another variable is established, then cash flow can be forecasted using the other variable. This would typically be accomplished with regression analysis. Regression analysis is a statistical method that can be used to assess the impact that a given independent variable or driver variable has on a dependent variable. To estimate the relationship using regression analysis, the user would need historical data values for the dependent and independent variable.

Question 56

What two things should be established at the start of a cash forecasting effort? A. Purpose and common terminology B. Clear expectations and common terminology C. Clear deadlines and common terminology D. Clear expectations and document processes

Answer 56

Answer is B Treasury depends on other business units for accurate and timely information, and in turn the business units are often dependent on the reliability of cash forecasts provided by treasury. Clear expectations and common terminology should be established from the start of any forecasting effort. Communication is a two-way process. Treasury will want to educate the business units in how to provide the required data, if data collation cannot be automated. The business units will be incentivized to provide accurate data promptly if treasury understands how the business units want to use the forecasts.

Question 57

A firm conducts business in the United States (USD), Canada (CAD), France (EUR), Germany (EUR), and Australia (AUD). When completing a cash flow forecast, how many forecasts will the firm be required to complete? A. Four B. Three C. One D. Five

Answer 57

Answer is A The CTP exam focuses on forecasting on currencies, not necessarily the individual countries.

Question 58

Which of the following is used to determine a company's need for short-term credit or the availability of funds for short-term investing? A. Medium-term forecasting B. Short-term forecasting C. Capital budgeting D. Long-term forecasting

Answer 58

Answer is A Cash forecasts from three to twelve months in length are an integral part of cash budgeting and are considered medium-term forecasts. These forecasts project the sources and uses of funds (discussed in Chapter 8, Financial Accounting and Reporting) on a monthly or quarterly basis. Medium-term forecasts are used to determine the firm’s need for short-term credit or the availability of excess cash for short-term investing. They also serve as a benchmark for performance by comparing actual cash flows to projected cash flows based on the cash budget.

Question 59

When the cash flows are relatively stable and known in advance what is the most appropriate platform to use for generating a cash flow forecast? A. Treasury management system (TMS) B. Enterprise resourcing planning system (ERP) C. Spreadsheet D. Enterprise performance management system (EPM)

Answer 59

Answer is C The most appropriate platform should be used to develop the forecast. When the cash flows are relatively stable and known in advance, there is very little need for sophisticated specialty tools to analyze the input data.

Question 60

What is the primary goal for developing a cash forecast? A. To determine the availability of capital B. To determine opportunities for short-term investment C. To optimize cash resources D. To determine credit worthiness

Answer 60

Answer is C

Question 61

A cash manager uses a simple average to calculate the distribution forecast for weekly payments sent to vendors. Which of the following represents the risks involved with this type of forecast? A. The forecast may not take factors such as holidays and seasonal trends into account B. The transaction requires large amounts of data and may need to be revised as business conditions change C. A simple average distribution forecast will always lag any trend in the actual cash flow D. A simple average distribution forecast will always lead any trend in the actual cash flow

Answer 61

Answer is A The problem with taking a simple average is that actual payment posting dates may be influenced by more factors than the number of days after issuance.