Investment and Short-Term Financing Flashcards

Which risk refers to the possibility that a short-term investment cannot be sold quickly at or near its fair market value?

Answer: Liquidity risk

Liquidity risk is the risk that an asset cannot be converted to cash quickly without a significant price concession.

A company needs to finance seasonal inventory buildups for 60-90 days. Which financing instrument is MOST appropriate?

Answer: Revolving credit facility

A revolving credit facility provides flexible, short-term borrowing that can be drawn and repaid as seasonal needs fluctuate.

The discount yield on a 91-day T-bill priced at $98.50 per $100 face value is approximately:

Answer: 5.94%

Discount yield = (Discount / Face Value) × (360 / Days) = (1.50 / 100) × (360 / 91) ≈ 5.94%.

Which characteristic of commercial paper makes it attractive as a short-term investment for corporations?

Answer: It typically offers higher yields than T-bills of similar maturity

Commercial paper is unsecured, so it carries more credit risk than T-bills and compensates investors with higher yields.

Under a sweep account arrangement, excess balances are typically transferred to which type of vehicle overnight?

Answer: Money market mutual funds or repo agreements

Sweep accounts automatically move excess balances into overnight money market funds or repurchase agreements to earn interest.

A borrower issues commercial paper at a 5.20% discount rate for 30 days with a $1,000,000 face value. What are the net proceeds?

Answer: $995,667

Net proceeds = Face × [1 − (Rate × Days / 360)] = $1,000,000 × [1 − (0.052 × 30/360)] ≈ $995,667.

Which type of repurchase agreement involves a third-party custodian holding the collateral securities?

Answer: Tri-party repo

In a tri-party repo, a clearing bank or custodian holds the collateral, reducing operational risk for both counterparties.