Investment and Short-Term Financing Flashcards

A company enters a repurchase agreement where it sells securities and agrees to repurchase them the next day. From the company's perspective, this transaction is:

Answer: A form of short-term borrowing secured by securities

A repo from the seller's perspective is collateralized borrowing; the company raises cash and pledges securities as collateral.

Which type of Eurodollar deposit is negotiable and can be traded in the secondary market before maturity?

Answer: Eurodollar CD

Eurodollar CDs are negotiable certificates of deposit issued by foreign bank branches that can be sold in the secondary market.

When evaluating short-term investment alternatives, which criterion takes priority according to standard cash management principles?

Answer: Ensuring safety of principal

Safety of principal is the paramount objective for short-term investments, followed by liquidity, then yield.

A company uses a credit facility with a 0.25% commitment fee on the unused portion. If the total facility is $50 million and $20 million is drawn, the annual commitment fee on the unused balance is:

Answer: $75,000

Unused balance = $30 million; fee = $30,000,000 × 0.0025 = $75,000 per year.

Which of the following instruments carries the LOWEST credit risk for a U.S.-based corporate investor?

Answer: U.S. Treasury bills

U.S. Treasury bills are direct obligations of the federal government and carry zero default risk, the lowest credit risk available.

A 'bullet' investment strategy involves:

Answer: Concentrating maturities around a specific future date

A bullet strategy concentrates all maturities at a single target date, useful when a large known cash need is anticipated.

The cost of trade credit (accounts payable financing) for terms of '2/10 net 30' if the discount is NOT taken is approximately:

Answer: 36.73%

Cost = [Discount% / (1 − Discount%)] × [360 / (Net days − Discount days)] = [2/98] × [360/20] ≈ 36.73%.