Question 1

For a small business,a major advantage of investing surplus funds in a money market mutual fund is&#10;A)the funds are insured&#10;B)diversification&#10;C)tax deferral&#10;D)none of the above

Accepted Answer

The major advantage of investing surplus funds in a money market mutual fund is diversification, meaning the funds are spread across a variety of low-risk investments. This reduces the risk of loss compared to putting all the funds into a single investment. Money market mutual funds also offer liquidity, meaning that the funds can be easily accessed if needed. While money market mutual funds may provide some tax benefits, they are not insured like bank deposits.

Question 2

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?&#10;A)it guides dollar amounts and maturities of investments&#10;B)it insures that state and federal regulations are met&#10;C)it protects the investment manager against shareholder lawsuits&#10;D)it ensures that the company's brokers and banks do not trick the company into making overly risky investments

Accepted Answer

Analyzing the pattern and variability of the investing company's cash flows is important because it helps guide the investment manager in determining the appropriate dollar amounts and maturities of their investments. This allows for more effective management of the company's short-term investments and helps to ensure that they are optimizing their returns while minimizing risk.

Question 3

What items should a portfolio manager seek to mirror when she develops a synthetic composite with which to best compare actual short-term portfolio performance?&#10;A)average coupon interest rate,maturity,and risk rating&#10;B)tax treatment,average coupon interest rate,and maturity&#10;C)similar investment style,maturity,and yield consistency&#10;D)average coupon interest rate,risk rating,and vulnerability to investor fund withdrawals

Accepted Answer

A

Question 4

&#34;Riding the yield curve&#34; involves&#10;A)investing each time the yield curve shifts&#10;B)investing the same amount each period to take advantage of an upward-sloping curve&#10;C)buying securities with maturities greater than the investment horizon,fully intending to liquidate them prior to maturity&#10;D)investing in adjustable rate securities

Accepted Answer

"Riding the yield curve" involves buying securities with maturities greater than the investment horizon, fully intending to liquidate them prior to maturity. This strategy works best with an upward-sloping yield curve, where longer-term securities have higher yields than shorter-term securities. By purchasing longer-term securities and selling them before maturity, investors can benefit from both the higher yield and potential capital gains due to the decrease in interest rates as the security approaches maturity. This strategy is not directly related to investing when the yield curve shifts, investing the same amount each period, or investing in adjustable rate securities.

Question 5

Specific Dynamics,Inc.,decides to keep $400 million in short-term securities and $2 million in cash.They have about $1,000 million in total assets.What kind of strategy is Specific Dynamics most likely following:

A)Low liquidity strategy
B)Medium liquidity strategy
C)High liquidity strategy
D)'a' or 'b'
E)'b' or 'c'

Accepted Answer

Specific Dynamics is likely following a medium to high liquidity strategy, as they are keeping a significant portion of their assets ($402 million out of $1000 million) in highly liquid forms (cash and short-term securities). This indicates a preference for having assets readily convertible to cash without significant loss, which is characteristic of medium to high liquidity strategies.

Question 6

Why should the investment manager not simply take the period-ending portfolio value,divide it by the previous period-ending portfolio value,and then subtract 1 to determine the realized yield?&#10;A)because this would be confusing to explain to the manager's superiors&#10;B)because these calculations are almost always done by dealers and brokers&#10;C)because funds may have been withdrawn during the period&#10;D)because this always inflates the actual yields and is misleading

Accepted Answer

This calculation method assumes that the starting and ending values of the period are the same, which is not always the case if funds have been withdrawn during the period. Therefore, it could lead to an inaccurate determination of the realized yield.

Question 7

Compared to investing with a securities brokerage,an advantage of investing surplus funds with the company's bank(s)is&#10;A)convenience&#10;B)deposit insurance&#10;C)the funds may serve as loan collateral&#10;D)all of the above&#10;E)'a' and 'b'

Accepted Answer

Investing surplus funds with the company's bank(s) offers several advantages over a securities brokerage, including convenience (as banks are often used for day-to-day financial transactions), deposit insurance (which provides a level of safety for the funds), and the possibility of using the funds as collateral for loans. These benefits collectively make option D correct.

Question 8

Which of the following is NOT a considered to be a passive investment strategy:&#10;A)Buy and hold&#10;B)Historical yield spread analysis&#10;C)Modified buy and hold&#10;D)All of the above are passive strategies

Accepted Answer

Historical yield spread analysis is an active investment strategy that involves analyzing historical trends in bond yield spreads to identify opportunities for investment. The other options (buy and hold, modified buy and hold) are considered to be passive investment strategies as they involve holding onto investments for an extended period without actively trading or trying to time the market.

Question 9

What is the correct ranking of investment guidelines for short-term investment portfolios (most important to least important)?&#10;A)yield,liquidity,safety&#10;B)liquidity,safety,yield&#10;C)yield,safety,liquidity&#10;D)safety,liquidity,yield

Accepted Answer

Safety, liquidity, and yield are the correct ranking of investment guidelines for short-term investment portfolios, in order of importance. Safety ensures the preservation of capital, liquidity ensures assets can be quickly converted to cash without significant loss, and yield is considered after these two to ensure the investment generates income.

Question 10

In a survey by Frankle and Coins of Fortune 1000 company chief financial officers,the most important attribute for managers following an aggressive cash management strategy was _______ as compared to _________ for moderate strategists.

A)Return,no specific attribute
B)Return,default risk
C)Default risk,return
D)Risk,no specific attribute

Accepted Answer

For aggressive cash management strategists, the most important attribute is return, while for moderate strategists, it is default risk.

Question 11

When determining how much of the firm's total assets to invest in cash and securities,a low-liquidity strategy entails investing ___________ of the assets in cash and securities,earning ____________ expected profits in total.

A)relatively less,relatively more
B)relatively more,relatively more
C)relatively less,relatively less
D)relatively more,relatively less

Accepted Answer

The answer of When determining how much of the firm's...

Question 12

An active strategy,popular in the 1980s,was:&#10;A)Dividend capture&#10;B)Dividend roll&#10;C)'a' and 'b'&#10;D)maturity spread swap&#10;E)'b' and 'd'

Accepted Answer

The answer of An active strategy,popular in the 1980s,was:&#10;A)Dividend capture&#10;B)Dividend...

Question 13

Why do short-term investors seek to invest in the largest possible denominations,given the amount of money they have to invest?&#10;A)because the commissions are lower&#10;B)because these securities are more often tax-free&#10;C)because these securities offer higher yields&#10;D)because of the status and prestige it brings

Accepted Answer

The answer of Why do short-term investors seek to invest...

Question 14

The document specifying a company's posture toward risk and return and how it is to be implemented is called a (an)&#10;A)statement of bylaws&#10;B)investment prescription&#10;C)investment policy&#10;D)stipulation of insurable risks

Accepted Answer

The answer of The document specifying a company's posture toward...

Question 15

Why should the investment officer be concerned about the loan covenants on the company's loans?&#10;A)they may force the company to invest in high-risk,high-return securities in order to have enough interest revenue to pay the loan's interest expense&#10;B)they may include fine print forcing the company to engage in illegal activities&#10;C)they may prohibit certain types and/or amounts of investments&#10;D)all of the above

Accepted Answer

The answer of Why should the investment officer be concerned...

Question 16

In a survey by Frankle and Coins of Fortune 1000 company chief financial officers,the most important attribute for managers following an aggressive cash management strategy was _______ as compared to _________ for moderate strategists.

A)Return,no specific attribute
B)Return,default risk
C)Default risk,return
D)Risk,no specific attribute

Accepted Answer

The answer of In a survey by Frankle and Coins...

Deck 15: Short-Term Investment Management