AAT L4 Cash & Treasury Management 3

Question 1

Interest rate risk arises when:

Accepted Answer

Changes in interest rates affect the cost of borrowing or the return on investments

Answer

Interest rate risk is the exposure to changes in interest rates that affect the cost of variable-rate borrowings or the return on variable-rate investments; it can affect both the income statement (interest charges) and cash flow.

Question 2

An interest rate swap allows a company to:

Accepted Answer

Convert a variable-rate loan to a fixed rate (or vice versa) by exchanging interest payments with a counterparty, while the principal is unchanged

Answer

An interest rate swap exchanges interest payment obligations — typically swapping a floating rate payment (e.g., SONIA + margin) for a fixed rate with a counterparty, effectively locking in a fixed interest cost without changing the underlying loan principal.

Question 3

Surplus short-term cash in a treasury function is typically invested in:

Accepted Answer

Short-term, highly liquid, low-risk instruments such as money market funds, treasury bills, or short-term bank deposits

Answer

Surplus short-term cash must be readily accessible and safe; treasury invests in liquid, low-risk instruments (money market funds, bank deposits, treasury bills) to earn a return without putting capital at risk or sacrificing liquidity.

Question 4

The 'matching principle' in working capital management means:

Accepted Answer

Long-term assets are funded with long-term finance; short-term assets are funded with short-term finance

Answer

The matching principle aligns the nature of the funding with the nature of the asset: long-term (non-current) assets should be financed with long-term capital; current assets may be funded by current liabilities — avoiding liquidity mismatches.

Question 5

A foreign currency transaction exposure arises when:

Accepted Answer

A business has a transaction denominated in a foreign currency — the sterling value will change if exchange rates move before settlement

Answer

Transaction exposure is the risk that exchange rate movements between the transaction date and the settlement date change the sterling value of a foreign currency receivable, payable, or commitment.

AAT Level 4 Practice Test

AAT Level 4 Practice Test

AAT L4 Cash & Treasury Management 3