CGFO Treasury Operations & Cash Management 3 — Questions and Answers
Question 1: Which of the following BEST describes the 'benchmark' used in evaluating a government investment portfolio's performance?
- The federal funds rate set by the Federal Reserve
- A market index with a duration and risk profile comparable to the portfolio's investment policy (Correct answer)
- The highest yield available from any permitted investment type
- The portfolio's historical average yield over the past 10 years
Correct answer: A market index with a duration and risk profile comparable to the portfolio's investment policy
A valid benchmark must reflect a similar duration and risk profile to the portfolio so performance comparisons are meaningful and fair.
Question 2: A government's investment policy statement (IPS) should PRIMARILY establish:
- The names of approved investment advisors and their compensation
- Objectives, permitted investments, risk parameters, and reporting requirements (Correct answer)
- A target rate of return above the Consumer Price Index
- The specific securities to be purchased in each fiscal quarter
Correct answer: Objectives, permitted investments, risk parameters, and reporting requirements
An IPS provides the governance framework by defining investment objectives, authorized instruments, risk tolerances, and reporting obligations.
Question 3: What is the primary purpose of a government's cash flow forecast in treasury management?
- To project end-of-year fund balances for budget adoption
- To determine the timing and amounts of investable cash to optimize liquidity and yield (Correct answer)
- To estimate future tax revenue for debt issuance planning
- To comply with GASB 34 financial reporting requirements
Correct answer: To determine the timing and amounts of investable cash to optimize liquidity and yield
Cash flow forecasting enables the treasury officer to identify when funds are available for investment and for how long, balancing liquidity needs with yield optimization.
Question 4: Under the prudent investor standard applicable to public funds, the treasury officer is required to:
- Achieve the highest possible return regardless of risk
- Exercise the judgment and care of a prudent person managing funds for the benefit of others (Correct answer)
- Follow only explicit statutory lists of permitted investments without further analysis
- Delegate all investment decisions to an external investment manager
Correct answer: Exercise the judgment and care of a prudent person managing funds for the benefit of others
The prudent investor standard requires the exercise of reasonable care, skill, and caution consistent with managing funds for the benefit of others.
Question 5: Which type of collateral arrangement for public deposits provides the STRONGEST protection to the government entity?
- Collateral held by the pledging bank in its own vault
- Collateral held by a third-party custodian in the government's name (Correct answer)
- A letter of credit from the pledging bank itself
- FDIC insurance alone without supplemental collateral
Correct answer: Collateral held by a third-party custodian in the government's name
Third-party custodial arrangements ensure collateral is segregated and controlled by an independent party in the government's name, providing the strongest protection.
Question 6: A government issues tax and revenue anticipation notes (TRANs). The PRIMARY purpose of this borrowing is to:
- Finance long-term capital infrastructure projects
- Bridge temporary cash flow gaps until tax revenues are received (Correct answer)
- Refinance outstanding long-term debt at lower interest rates
- Fund pension system unfunded liabilities
Correct answer: Bridge temporary cash flow gaps until tax revenues are received
TRANs are short-term borrowing instruments used by governments to manage seasonal cash flow shortfalls until anticipated revenues are collected.
Question 7: When evaluating counterparty risk in government investment transactions, which factor is MOST relevant?
- The counterparty's geographic proximity to the government office
- The counterparty's credit rating, financial strength, and regulatory standing (Correct answer)
- Whether the counterparty offers the lowest transaction fees
- The number of years the counterparty has been in business
Correct answer: The counterparty's credit rating, financial strength, and regulatory standing
Credit rating, financial strength, and regulatory standing are the primary indicators of a counterparty's ability to fulfill its obligations.
CGFO Treasury Operations & Cash Management 3
Which of the following BEST describes the 'benchmark' used in evaluating a government investment portfolio's performance?