CGFO Treasury Operations & Cash Management 4 — Questions and Answers
Question 1: A government treasury officer discovers that an investment maturity schedule creates a 'concentration risk.' This means:
- Too many investments are held in a single maturity period, creating reinvestment or liquidity risk (Correct answer)
- The portfolio is concentrated in high-credit-quality securities
- All investments are with a single broker-dealer
- The investment portfolio is too diversified across asset classes
Correct answer: Too many investments are held in a single maturity period, creating reinvestment or liquidity risk
Concentration risk in maturity scheduling means too many securities mature at the same time, potentially forcing reinvestment at unfavorable rates or creating liquidity gaps.
Question 2: Which of the following is a key advantage of using a local government investment pool (LGIP) for public fund investment?
- Guaranteed returns above Treasury bill rates
- Daily liquidity, professional management, and economies of scale for smaller governments (Correct answer)
- Exemption from all state investment statutes
- Direct ownership of individual securities in the pool
Correct answer: Daily liquidity, professional management, and economies of scale for smaller governments
LGIPs provide smaller governments with daily liquidity, access to professional portfolio management, and cost efficiencies unavailable when investing independently.
Question 3: What is the 'duration' of an investment portfolio, and why does it matter to a government treasurer?
- The number of securities in the portfolio; more securities mean higher diversification
- A measure of price sensitivity to interest rate changes; higher duration means greater market risk (Correct answer)
- The average age of securities in the portfolio by purchase date
- The total holding period since the portfolio was established
Correct answer: A measure of price sensitivity to interest rate changes; higher duration means greater market risk
Duration measures how much a bond's price changes with a 1% change in interest rates; a higher duration portfolio carries greater market value risk in rising rate environments.
Question 4: A government's bank reconciliation reveals 'outstanding checks' totaling $500,000. These represent:
- Checks that have been returned due to insufficient funds
- Checks issued by the government but not yet cleared the bank (Correct answer)
- Bank fees that have not been recorded in the general ledger
- Deposits made by the government but not yet credited by the bank
Correct answer: Checks issued by the government but not yet cleared the bank
Outstanding checks are checks the government has issued and recorded as disbursements but that have not yet been presented to and cleared the bank.
Question 5: Under GASB standards, unrealized gains and losses on investments reported at fair value should be:
- Deferred until the investment is sold
- Recognized in the period in which they occur as investment income or loss (Correct answer)
- Netted against the cost basis and excluded from the income statement
- Reported only in the notes to the financial statements
Correct answer: Recognized in the period in which they occur as investment income or loss
GASB requires that changes in fair value of investments be recognized as investment income or loss in the period they occur.
Question 6: Which cash acceleration technique involves the government receiving payments electronically rather than by paper check?
- Controlled disbursement
- Electronic funds transfer (EFT) / ACH collection (Correct answer)
- Lockbox banking
- Zero-balance account (ZBA) management
Correct answer: Electronic funds transfer (EFT) / ACH collection
EFT and ACH collection eliminate mail and check-clearing float by having payers transfer funds electronically, accelerating availability of cash.
Question 7: A government entity's investment policy limits any single issuer (other than the U.S. government) to 10% of the portfolio. This provision addresses:
- Interest rate risk
- Credit concentration risk (Correct answer)
- Liquidity risk
- Currency risk
Correct answer: Credit concentration risk
Issuer concentration limits reduce credit concentration risk by preventing overexposure to any single obligor's potential default.
CGFO Treasury Operations & Cash Management 4
A government treasury officer discovers that an investment maturity schedule creates a 'concentration risk.' This means: