AFP Liquidity Management 2 — Questions and Answers
Question 1: In a notional pooling arrangement, which of the following is true?
- Physical funds are swept into a single account
- Interest is calculated on the net position of all accounts without physically moving funds (Correct answer)
- Each subsidiary account earns interest independently
- Surplus cash is automatically invested in money market funds
Correct answer: Interest is calculated on the net position of all accounts without physically moving funds
In notional pooling, interest is calculated on the combined net balance of all participating accounts without physically transferring funds between accounts.
Question 2: Which metric is most commonly used by treasury professionals to monitor daily liquidity risk?
- Earnings per share (EPS)
- Net cash position (Correct answer)
- Price-to-earnings ratio
- Debt-to-equity ratio
Correct answer: Net cash position
Net cash position — the difference between available cash and immediate obligations — is the primary daily metric for monitoring a company's liquidity risk.
Question 3: A company with a Days Sales Outstanding (DSO) of 65 days and industry average of 45 days should:
- Accelerate its payment terms to suppliers
- Review its credit and collections policies to speed up receivables (Correct answer)
- Increase inventory levels to support sales
- Issue long-term debt to fund the shortfall
Correct answer: Review its credit and collections policies to speed up receivables
A DSO above the industry average indicates slow collection of receivables; improving credit terms and collections processes can shorten DSO and improve liquidity.
Question 4: Which of the following short-term investment instruments is considered the most liquid?
- 10-year Treasury bonds
- U.S. Treasury bills (T-bills) (Correct answer)
- Corporate bonds rated BB
- Real estate investment trusts (REITs)
Correct answer: U.S. Treasury bills (T-bills)
U.S. Treasury bills are considered the most liquid short-term investment due to their active secondary market, government backing, and short maturities.
Question 5: Accelerating cash inflows is best achieved by which of the following techniques?
- Extending supplier payment terms
- Implementing electronic invoicing and lockbox services (Correct answer)
- Increasing inventory safety stock
- Issuing commercial paper
Correct answer: Implementing electronic invoicing and lockbox services
Electronic invoicing speeds up the billing cycle while lockbox services reduce mail and processing float, both accelerating the receipt of customer payments.
Question 6: The primary purpose of maintaining a liquidity buffer is to:
- Maximize return on invested assets
- Protect against unexpected cash shortfalls without disrupting operations (Correct answer)
- Reduce the company's effective tax rate
- Signal financial strength to equity investors
Correct answer: Protect against unexpected cash shortfalls without disrupting operations
A liquidity buffer protects the company from unexpected cash outflows or revenue shortfalls, ensuring operations can continue without emergency borrowing.
Question 7: Which of the following best describes 'zero-balance accounts' (ZBAs)?
- Accounts that earn zero interest regardless of balance
- Subsidiary accounts that automatically zero out by transferring funds to or from a master account (Correct answer)
- Accounts with no overdraft protection
- Investment accounts limited to government securities
Correct answer: Subsidiary accounts that automatically zero out by transferring funds to or from a master account
ZBAs automatically sweep to a zero balance at the end of each day by transferring excess funds to or drawing funds from a central master account, centralizing liquidity.
AFP Liquidity Management 2
In a notional pooling arrangement, which of the following is true?