CCM Investment and Short-Term Financing 2 — Questions and Answers
Question 1: Which risk refers to the possibility that a short-term investment cannot be sold quickly at or near its fair market value?
- Credit risk
- Liquidity risk (Correct answer)
- Interest rate risk
- Reinvestment risk
Correct answer: Liquidity risk
Liquidity risk is the risk that an asset cannot be converted to cash quickly without a significant price concession.
Question 2: A company needs to finance seasonal inventory buildups for 60-90 days. Which financing instrument is MOST appropriate?
- Long-term bonds
- Revolving credit facility (Correct answer)
- Preferred stock issuance
- Mortgage-backed securities
Correct answer: Revolving credit facility
A revolving credit facility provides flexible, short-term borrowing that can be drawn and repaid as seasonal needs fluctuate.
Question 3: The discount yield on a 91-day T-bill priced at $98.50 per $100 face value is approximately:
- 5.88%
- 5.94% (Correct answer)
- 6.04%
- 1.52%
Correct answer: 5.94%
Discount yield = (Discount / Face Value) × (360 / Days) = (1.50 / 100) × (360 / 91) ≈ 5.94%.
Question 4: Which characteristic of commercial paper makes it attractive as a short-term investment for corporations?
- It is FDIC insured up to $250,000
- It is backed by a federal government guarantee
- It typically offers higher yields than T-bills of similar maturity (Correct answer)
- It can be redeemed before maturity without penalty
Correct 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.
Question 5: Under a sweep account arrangement, excess balances are typically transferred to which type of vehicle overnight?
- Long-term CDs
- Money market mutual funds or repo agreements (Correct answer)
- Equity index funds
- Asset-backed securities
Correct 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.
Question 6: 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?
- $995,667 (Correct answer)
- $947,000
- $994,333
- $956,667
Correct answer: $995,667
Net proceeds = Face × [1 − (Rate × Days / 360)] = $1,000,000 × [1 − (0.052 × 30/360)] ≈ $995,667.
Question 7: Which type of repurchase agreement involves a third-party custodian holding the collateral securities?
- Bilateral repo
- Tri-party repo (Correct answer)
- Open repo
- Term repo
Correct answer: Tri-party repo
In a tri-party repo, a clearing bank or custodian holds the collateral, reducing operational risk for both counterparties.
CCM Investment and Short-Term Financing 2
Which risk refers to the possibility that a short-term investment cannot be sold quickly at or near its fair market value?