CGFO Treasury Operations & Cash Management 5 — Questions and Answers
Question 1: A zero-balance account (ZBA) structure in government banking is designed to:
- Maintain a fixed minimum balance to avoid service fees
- Automatically sweep subsidiary account balances to a master concentration account daily (Correct answer)
- Earn interest on all disbursement accounts individually
- Prevent any overdrafts by maintaining zero activity in the account
Correct answer: Automatically sweep subsidiary account balances to a master concentration account daily
A ZBA automatically sweeps funds to or from a master account to maintain a zero balance in subsidiary accounts, centralizing cash for investment and reducing idle balances.
Question 2: Which scenario represents an appropriate use of an interest rate swap for a government entity?
- Converting fixed-rate debt to variable-rate to speculate on declining rates
- Converting variable-rate debt to fixed-rate to reduce budget uncertainty and interest rate risk (Correct answer)
- Generating fee income by selling swap contracts to other municipalities
- Replacing a bond issuance entirely to avoid disclosure requirements
Correct answer: Converting variable-rate debt to fixed-rate to reduce budget uncertainty and interest rate risk
Governments may use interest rate swaps to convert variable-rate debt to fixed-rate, providing budget certainty and managing interest rate exposure.
Question 3: What is the significance of 'value date' in government wire transfer operations?
- The date the wire transfer request form is signed by the finance officer
- The date on which funds are actually available and the transaction settles (Correct answer)
- The date the wire transfer appears in the accounting system
- The date the bank debits the government's account for service fees
Correct answer: The date on which funds are actually available and the transaction settles
The value date is the date on which the wire transfer funds become available to the recipient and the transaction is considered fully settled.
Question 4: A treasury officer is evaluating whether to use a broker-dealer for investment transactions. GFOA best practices recommend the government:
- Use the same broker-dealer for all transactions to simplify accounting
- Maintain a list of approved broker-dealers selected through a competitive process (Correct answer)
- Rely solely on broker-dealer recommendations without independent analysis
- Avoid all broker-dealers and transact only through bank trust departments
Correct answer: Maintain a list of approved broker-dealers selected through a competitive process
GFOA recommends maintaining an approved broker-dealer list established through a competitive process, with periodic review of each firm's qualifications.
Question 5: Under the GFOA's recommended disclosure practices, a government's investment report to the governing body should include:
- Only the total market value of the portfolio
- Portfolio composition, maturity schedule, earnings, compliance with policy, and market value (Correct answer)
- Investment decisions made since the last report without performance data
- Only securities that have experienced gains since purchase
Correct answer: Portfolio composition, maturity schedule, earnings, compliance with policy, and market value
A comprehensive investment report provides the governing body with portfolio composition, maturity structure, earnings, policy compliance status, and current market values.
Question 6: What is 'securities lending' in the context of a government investment portfolio?
- Borrowing securities from another government to fulfill a delivery obligation
- Temporarily loaning portfolio securities to borrowers in exchange for collateral and a lending fee (Correct answer)
- Selling securities on margin to increase portfolio yield
- A practice where the government lends cash to broker-dealers secured by securities
Correct answer: Temporarily loaning portfolio securities to borrowers in exchange for collateral and a lending fee
Securities lending involves temporarily loaning portfolio securities to approved borrowers who post collateral, generating additional income for the government.
Question 7: When a government's investment policy requires 'safekeeping' of securities, this means the securities must be:
- Stored in a fireproof safe at the government's main office
- Held by a third-party custodian in the government's name, separate from the broker-dealer or bank (Correct answer)
- Kept on the broker-dealer's books with a notation of government ownership
- Registered electronically in the broker-dealer's omnibus account
Correct answer: Held by a third-party custodian in the government's name, separate from the broker-dealer or bank
Safekeeping requires securities to be held by an independent third-party custodian in the government's name, protecting against broker-dealer insolvency and fraud.
CGFO Treasury Operations & Cash Management 5
A zero-balance account (ZBA) structure in government banking is designed to: