Mixed Deck — All CTP Topics Flashcards

What does a 'make-whole call' provision protect in a bond?

Answer: Bondholders, by requiring the issuer to pay a premium based on the present value of remaining cash flows if called early

A make-whole call requires issuers to pay bondholders the present value of remaining cash flows discounted at a low spread to Treasuries, making early calls very expensive.

Which of the following describes the primary function of Value at Risk (VaR) in a corporate treasury context?

Answer: To estimate the potential loss in value of a portfolio over a defined period for a given confidence interval under normal market conditions.

Value at Risk (VaR) is a statistical technique used to measure and quantify the level of financial risk within a portfolio over a specific time frame and at a given confidence level (e.g., 95% or 99%). It estimates the potential loss due to 'normal' market movements, not the absolute maximum loss or losses from extreme tail-risk events. For example, a one-day 95% VaR of $1 million means there is a 95% chance the portfolio will not lose more than $1 million in one day.

Which of the following is an example of a preventive control in treasury operations?

Answer: Requiring dual authorization before releasing a wire payment

Requiring dual authorization before releasing payments prevents unauthorized transactions from occurring.

The primary purpose of a daily cash position report is to:

Answer: Identify surplus or deficit cash to guide same-day investment or borrowing decisions

A daily cash position report aggregates bank balances, expected receipts, and disbursements so treasury can take timely action to invest surplus or cover shortfalls.

Stress testing differs from VaR analysis because stress testing:

Answer: Examines the impact of severe but plausible scenarios rather than relying on historical distributions

Stress testing evaluates portfolio impact under specific extreme scenarios (e.g., 2008 financial crisis) and does not rely on historical return distributions as VaR does.

A corporate treasurer wants to protect against rising rates on anticipated debt issuance six months from now. The most direct hedge is to:

Answer: Sell Treasury bond futures

Selling Treasury bond futures profits when rates rise (bond prices fall), offsetting the higher borrowing cost the company will face at issuance.

Which of the following is NOT a typical component of a corporate risk management policy statement?

Answer: Specific profit targets from speculative trading positions

Corporate risk management policies govern hedging of existing exposures, not speculation; profit targets from speculative trading would be inconsistent with a hedging mandate.

Under the Federal Reserve's Regulation CC, which type of check deposit typically has the longest hold period before funds are made available?

Answer: Non-local checks

Non-local checks (drawn on banks outside the Federal Reserve check processing region) historically had the longest availability holds under Reg CC.

Which credit metric is most commonly used by rating agencies to assess leverage for industrial companies?

Answer: Net debt / EBITDA

Net debt-to-EBITDA is the primary leverage metric because it measures how many years of operating earnings are needed to repay net debt, adjusted for non-cash charges.

A company reports EBITDA of $5M, interest expense of $1M, taxes of $0.5M, depreciation of $0.8M, and amortization of $0.2M. What is net income?

Answer: $2.5M

Net income = EBITDA − D&A − Interest − Taxes = $5M − $1M − $0.5M − $1M = $2.5M.

What is the primary compliance significance of the Financial Industry Regulatory Authority (FINRA) for corporate treasury operations?

Answer: FINRA supervises broker-dealers that treasury departments use to execute securities transactions

FINRA is a self-regulatory organization that oversees broker-dealers and their registered representatives, who frequently facilitate securities transactions on behalf of corporate treasury departments.

Which of the following best describes the 'agency cost of equity' problem in capital structure?

Answer: Managers acting in their own interests rather than maximizing shareholder value, partly mitigated by debt obligations

Agency costs of equity arise from manager-shareholder conflicts; debt can reduce these costs by constraining managerial discretion over free cash flow and aligning incentives through default risk.

Your business has been informed of three payments: the first, for $2,500, will be made right away; the second, for $1,700, will be made at the end of the first year; and the third, for $3,100, will be made at the end of the second year. Your task is to determine how much the entire stream of payments (future value) will be worth at the conclusion of year two assuming an investment rate of 6%. Keep in mind that the third payment won't be received in time for compounding.

Answer: $7,711.00

Future Value = $2,500 (1+1.06)2 + $1,700 (1+.06)1 + $3,100 = $2,500 (1.1236) + $1,700 (1.06) + $3,100 = $2,809 + $1,802 + $3,100 = $7,711

Under the Economic Order Quantity (EOQ) model, ordering costs and carrying costs are EQUAL at the:

Answer: Optimal order quantity

The EOQ is the quantity at which total ordering costs equal total carrying costs, minimizing total inventory costs.

Which of the following BEST describes the incremental approach to analyzing a replacement decision?

Answer: Compare cash flows of the new machine versus continuing with the old machine

Replacement decisions require incremental analysis comparing the differential cash flows between keeping the old and adopting the new asset.

The weighted average cost of capital (WACC) used as a discount rate implicitly assumes that the project:

Answer: Has the same risk as the firm's existing asset portfolio

Using the firm's WACC is only appropriate when the project has similar risk and capital structure characteristics as the firm's existing operations.

The majority of the above are treasury management duties, EXCEPT:

Answer: collecting and presenting financial information

All of the aforementioned tasks fall under the purview of treasury management, with the exception of gathering and presenting financial data, which is of an internal nature and is thus the responsibility of the controller. In contrast, treasury management, which focuses mostly on external finance issues, is responsible for maintaining liquidity, managing risk, and investing for both short- and long-term needs.

Which approach BEST describes 'target balancing' in a notional pooling structure?

Answer: Setting a minimum required balance in each account and sweeping excess to a master account

Target balancing sweeps only the amount above a predetermined target balance, maintaining a minimum operational reserve in each account.

When evaluating a TMS for payment processing, which integration capability is most critical to achieving straight-through processing (STP)?

Answer: Bidirectional ERP integration for automated payment file generation and bank statement import

Bidirectional ERP-TMS integration eliminates manual data entry by automatically generating payment files from approved invoices and importing bank statements for reconciliation.

Which of the several investment analysis styles tries to evaluate both the best- and worst-case outcomes when various conditions are put on the variables in order to determine the worth or risk of a particular investment?

Answer: Scenario analysis

In scenario analysis, many situations are imposed on the variables, and various outcomes are evaluated (best and worst). Cost-benefit analysis is to determine whether a certain plan's economic benefits outweigh its economic costs. Sensitivity analysis examines how changes in the values of variables and various assumptions affect an outcome. Combining scenario and sensitivity analysis is simulation analysis.