Question 1

"Eurodollars" or "international dollars" are:

Accepted Answer

Eurodollars or international dollars are dollars deposited in banks outside the U.S. They are called Eurodollars because they were originally deposited in European banks in the 1950s, but now can be deposited in any bank anywhere outside the U.S.

Question 2

The most common cash management technique used to speed up collections is:

Accepted Answer

Lockboxes are the most common cash management technique used to speed up collections as they allow customers to send payments directly to a designated post office box that is controlled by the company's bank. The bank then picks up and processes the payments, making the funds quickly available to the company. This process not only speeds up collections but also reduces the risk of fraud or theft as it eliminates the need for employees to handle incoming payments.

Question 3

Which of the following is a real-time gross settlement system:

Accepted Answer

Fedwire is a real-time gross settlement system used for large-value transfers in the United States.

Question 4

A municipal variable rate demand bond (VRDB):
I.is a long-term security;
II.has interest payments linked to the level of short-term interest rates;
III.may periodically be sold back to the issuer at face value;
IV.is tax-exempt

Accepted Answer

A municipal VRDB is a long-term security (I) with interest payments linked to short-term rates (II). It can be sold back to the issuer at face value (III) and is typically tax-exempt (IV).

Question 5

In the U.S.,small-value electronic transfers are made through:
I.Fedwire;
II.ACH;
III.CHIPS

Accepted Answer

Small-value electronic transfers are typically made through Automated Clearing House (ACH) in the U.S. Fedwire and CHIPS are systems that are used for large-value transfers.

Question 6

If the short-term commercial paper rate is 6% and the corporate tax rate is 35%,what yield would a corporation require on an investment in floating-rate preferred stock? Assume the default risk is the same as for commercial paper.

Accepted Answer

The answer of If the short-term commercial paper rate is...

Question 7

Negotiable CDs are issued by:

Accepted Answer

Negotiable CDs are typically issued by banks as a type of short-term debt instrument. They are similar to regular CDs, but can be traded in secondary markets, allowing investors the opportunity to buy and sell them before maturity.

Question 8

A large firm may hold substantial cash balances because:

Accepted Answer

A large firm may hold substantial cash balances because of any of these reasons: they are required by the bank in the form of compensating balances, they have accounts in many different banks, or they have a very decentralized organization. Therefore, option D, which includes all of these options, is the best choice.

Question 9

The market for short-term investments is called:

Accepted Answer

The market for short-term investments is referred to as the money market. The money market is a segment of the financial market where financial instruments with high liquidity and short maturities are traded. These instruments include Treasury bills, certificates of deposit, commercial paper, and banker's acceptances. The money market enables governments, corporations, and financial institutions to borrow and lend money on a short-term basis. Therefore, option D, money market, is the best choice for this question.

Question 10

A repurchase agreement occurs when:

Accepted Answer

A repurchase agreement, also known as a repo, is a financial transaction where an investor buys securities (often Treasury bonds) from a dealer (often a bank) and simultaneously agrees to sell them back at a later date, usually within a few days or weeks. The dealer effectively raises short-term funds by borrowing against the securities it holds in its inventory. Repurchase agreements are commonly used in the money markets to generate short-term liquidity or as a way for dealers to finance their inventory of securities. Choices A, B, and D do not accurately describe a repurchase agreement.

Question 11

A tax-paying corporation would prefer to invest short-term money in:

Accepted Answer

A tax-paying corporation would prefer to invest short-term money in floating-rate preferred stock as it offers a fixed income stream and the dividends are usually eligible for the dividend received deduction. Unlike common stock, preferred stocks pay a fixed dividend, making it a more reliable income stream. Long-term bonds may have higher yields, but they are subject to interest rate risks, which makes them a less attractive investment option for short-term funds. Warrants are a type of option that gives the holder the right to buy or sell a security, but they are not a reliable short-term investment option.

Question 12

Floating-rate preferred stock offers competitive rates of return with traditional money market instruments but:

Accepted Answer

Floating-rate preferred stock still provides the corporate investor with the tax exclusion on dividend income, making it a competitive option compared to traditional money market instruments. However, it may still be rated by Moody's or Standard & Poor's and does not have a fixed rate of dividend income. The trading market for floating-rate preferred stock may also vary depending on the specific stock.

Question 13

Firms that receive a large volume of checks use the following to speed up availability of funds:

Accepted Answer

Concentration banking is a system in which a firm maintains accounts at multiple bank branches and transfers funds from these accounts to a central account. This allows for quicker availability of funds as checks can be deposited at these multiple branches and then transferred to the central account for processing. This method is helpful for firms that receive a large volume of checks as it speeds up the availability of funds. Retail banking and money market deposit accounts may not be as effective in speeding up the availability of funds for firms with a large volume of checks.

Question 14

Which of the following have the most developed secondary market?

Accepted Answer

Treasury bills have the most developed secondary market due to their high liquidity, low risk, and the fact that they are backed by the U.S. government, making them highly attractive to investors.

Question 15

The main advantage of using a netting system to settle foreign currency payments is that it:

Accepted Answer

The main advantage of using a netting system is that it drastically reduces the number of payments that need to be made, which can save time and cost for businesses or financial institutions.

Question 16

The discount on a 91-Treasury bill is 5.65%.What is the annually compounded rate of return? (Assume a 360-day discount basis.)

Accepted Answer

The annually compounded rate of return can be calculated as follows:

Rate = [(Face value - Price)/Price] x (360/Days to Maturity)

Where,
Face value = 100
Price = 100 - 5.65 = 94.35
Days to Maturity = 91

Rate = [(100 - 94.35)/94.35] x (360/91) = 0.059 or 5.9%

Therefore, the annually compounded rate of return is 5.9%, which is closest to option B (5.9%).

Question 17

The discount on a 91-Treasury bill is 5.2%.What is the annually compounded rate of return? (Assume a 360-day discount basis.)

Accepted Answer

The annually compounded rate of return can be calculated using the following formula:

annual rate = [(face value - discounted price) / discounted price] * (360 / days to maturity)

Using the given values, we have:

annual rate = [(100 - 94.8) / 94.8] * (360 / 91)
           = 0.052, or 5.2%

Therefore, the correct answer is option C, 5.4%.

Question 18

The following are advantages of electronic payment systems except:

Accepted Answer

The advantages listed in choices A, B, and C are commonly associated with electronic payment systems. However, the initial investment required to set up electronic payment systems can be high, especially for small businesses or individuals. Therefore, the correct answer is D.

Question 19

The following are money market instruments except:

Accepted Answer

T-bills, federal agency discount notes, and commercial paper are all examples of money market instruments, but preferred stocks are not considered money market instruments as they are equity securities and are not typically used for short-term investing or borrowing.

Question 20

If the short-term commercial paper rate is 10% and the corporate tax rate is 35%,what yield would a corporation require on an investment in floating-rate preferred stock? Assume the default risk is the same as for commercial paper.

Accepted Answer