CCM Treasury Operations and Banking Relations 2 — Questions and Answers
Question 1: A company negotiates a compensating balance arrangement with its bank. What is the primary purpose of this arrangement?
- To offset bank service fees by maintaining a minimum deposit balance (Correct answer)
- To earn interest on excess cash deposited above the threshold
- To secure a line of credit without a formal loan agreement
- To reduce the company's required reserve ratio
Correct answer: To offset bank service fees by maintaining a minimum deposit balance
Compensating balances are minimum deposit levels a company maintains to offset the cost of banking services or credit facilities.
Question 2: Which type of bank account allows a company to issue checks up to a predetermined credit limit even with a zero balance?
- Zero Balance Account (ZBA)
- Demand Deposit Account (DDA)
- Controlled Disbursement Account (Correct answer)
- Sweep Account
Correct answer: Controlled Disbursement Account
Controlled disbursement accounts are linked to a master account; the bank reports check presentments early each morning so the company can fund only the exact amount needed.
Question 3: A treasury manager wants to consolidate balances from multiple subsidiary accounts into one master account daily. Which structure best achieves this?
- Notional pooling
- Physical cash pooling (ZBA structure) (Correct answer)
- Lockbox network
- Positive pay system
Correct answer: Physical cash pooling (ZBA structure)
Physical cash pooling with Zero Balance Accounts (ZBAs) automatically sweeps subsidiary balances to or from a master account to maintain zero balances in subsidiary accounts.
Question 4: What is the key advantage of notional pooling compared to physical pooling for a multinational corporation?
- Funds are physically moved to a central account for investment
- Interest is calculated on the net combined balance without actual fund transfers (Correct answer)
- It eliminates foreign exchange risk across all currencies
- It requires fewer bank relationships to manage
Correct answer: Interest is calculated on the net combined balance without actual fund transfers
Notional pooling offsets debit and credit balances across accounts mathematically, so interest is calculated on the net position without requiring physical fund transfers.
Question 5: In evaluating bank performance under an Account Analysis Statement, what does 'earnings credit rate' (ECR) represent?
- The interest rate paid on overnight Fed Funds sold to the bank
- The rate applied to average collected balances to generate earnings credits offsetting service charges (Correct answer)
- The rate banks charge for wire transfer services
- The penalty rate for falling below minimum compensating balances
Correct answer: The rate applied to average collected balances to generate earnings credits offsetting service charges
The ECR is applied to average investable balances to calculate earnings credits, which are then used to offset the bank's service charges on the account analysis statement.
Question 6: A company's bank account analysis shows excess earnings credits. What is the standard treatment of these excess credits?
- They are paid out as cash to the company
- They can be rolled forward to offset next month's charges
- They are forfeited and cannot be carried over (Correct answer)
- They automatically convert to overnight investment returns
Correct answer: They are forfeited and cannot be carried over
Excess earnings credits typically cannot be carried forward and are forfeited, which is why companies aim to match balances to exactly offset service charges.
Question 7: Which banking service provides a company with early morning notification of checks presented for payment, enabling same-day funding decisions?
- Remote Deposit Capture (RDC)
- Positive Pay
- Controlled Disbursement (Correct answer)
- ACH Debit Filter
Correct answer: Controlled Disbursement
Controlled disbursement accounts report all checks presented for payment early in the morning, giving the treasury team time to fund exactly the right amount that day.
CCM Treasury Operations and Banking Relations 2
A company negotiates a compensating balance arrangement with its bank.
What is the primary purpose of this arrangement?