Investment and Short-Term Financing Flashcards

What is the main objective of short-term investing in treasury management?

Answer: To preserve capital and maintain liquidity

The primary objective of short-term investing in treasury management is not to maximize returns, but to ensure the safety of the principal (preserve capital) and readily access funds when needed (maintain liquidity). Companies invest surplus cash in highly liquid, low-risk instruments to meet immediate operational needs and unexpected expenses. This conservative approach prioritizes financial stability over aggressive growth.

Which instrument is considered a safe short-term investment?

Answer: Treasury bills

Treasury bills (T-bills) are short-term debt instruments issued by the U.S. government. They are considered one of the safest short-term investments because they are backed by the full faith and credit of the U.S. government, carrying virtually no default risk. Their short maturity also contributes to their low-risk profile, making them ideal for capital preservation.

What is a key advantage of using a revolving line of credit for short-term financing?

Answer: Flexible access to short-term funding

A revolving line of credit provides companies with flexible access to short-term funding up to a pre-approved limit. Unlike a term loan, funds can be borrowed, repaid, and re-borrowed as needed, making it ideal for managing fluctuating working capital needs. This flexibility allows companies to draw funds only when necessary, minimizing interest expenses.

Which of the following best describes commercial paper?

Answer: Unsecured short-term corporate debt

Commercial paper is an unsecured promissory note issued by large, creditworthy corporations to raise short-term funds. It is typically issued at a discount and matures in 270 days or less. Being unsecured, its issuance relies heavily on the issuer's credit rating, making it a cost-effective way for strong companies to access short-term capital without collateral.

Why might a company choose factoring as a short-term financing option?

Answer: To convert receivables into cash quickly

Factoring is a financial transaction where a company sells its accounts receivable to a third party (the factor) at a discount. This allows the company to receive immediate cash for its invoices, rather than waiting for customers to pay. It's a useful option for companies needing to improve their cash flow quickly, especially those with long payment terms or limited access to traditional credit.

Which of the following would most likely be used for managing daily liquidity?

Answer: Money market funds

Money market funds are mutual funds that invest in highly liquid, short-term debt instruments like Treasury bills, commercial paper, and certificates of deposit. They are designed for managing daily liquidity because they offer a stable net asset value, easy access to funds, and typically provide a higher yield than traditional checking or savings accounts. Their low risk and high liquidity make them ideal for short-term cash management.