CTP Corporate Liquidity and Cash Management 3 — Questions and Answers
Question 1: A treasury department uses a lockbox network to accelerate collections. The PRIMARY benefit of a lockbox system is:
- Reducing bank service fees on check processing
- Accelerating mail and processing float to increase available funds sooner (Correct answer)
- Eliminating the need for accounts receivable reconciliation
- Providing real-time fraud detection on incoming checks
Correct answer: Accelerating mail and processing float to increase available funds sooner
Lockbox services reduce collection float by intercepting mail near payers and expediting check processing, making funds available faster.
Question 2: Which short-term investment vehicle offers the HIGHEST degree of safety and liquidity with minimal credit risk for corporate cash reserves?
- Commercial paper rated A-2/P-2
- Repurchase agreements (repos) backed by Treasuries (Correct answer)
- Bankers' acceptances
- Eurodollar deposits
Correct answer: Repurchase agreements (repos) backed by Treasuries
Repo agreements collateralized by U.S. Treasuries combine high safety (government-backed collateral) with overnight liquidity.
Question 3: A company's daily cash position shows a consistent $5M surplus each morning that is swept to overnight investments. This practice is known as:
- Target balancing
- Overnight repo investing
- Cash concentration (Correct answer)
- Controlled disbursement
Correct answer: Cash concentration
Cash concentration aggregates funds from multiple accounts into a central investment account to maximize returns on surplus balances.
Question 4: The Baumol cash management model is primarily used to determine:
- Optimal credit terms for customers
- Optimal transaction size for converting securities to cash (Correct answer)
- Optimal float management strategies
- Optimal maturity distribution for investment portfolios
Correct answer: Optimal transaction size for converting securities to cash
The Baumol model applies EOQ inventory logic to cash management to find the optimal amount to convert from securities to cash per transaction.
Question 5: In which scenario would a company MOST likely use a revolving credit facility rather than commercial paper?
- When the company has the highest possible credit rating and needs funding below 270 days
- When the company needs a reliable liquidity backstop and credit markets are volatile (Correct answer)
- When short-term interest rates are at historic lows
- When the company wants to avoid SEC registration requirements
Correct answer: When the company needs a reliable liquidity backstop and credit markets are volatile
Revolving credit facilities provide committed backup liquidity even during market stress, making them ideal backstops when commercial paper markets may be inaccessible.
Question 6: A treasury manager is calculating the benefit of a new cash management system that reduces the average daily float by $2M. If the company's opportunity cost of capital is 5%, what is the annual benefit?
- $10,000
- $100,000 (Correct answer)
- $1,000,000
- $2,000,000
Correct answer: $100,000
Annual benefit = $2,000,000 × 5% = $100,000, representing the earnings generated by investing the recovered float.
Question 7: Which statement BEST describes the relationship between disbursement float and a company's available bank balance?
- Disbursement float decreases the available bank balance below the book balance
- Disbursement float increases the available bank balance above the book balance (Correct answer)
- Disbursement float has no effect on the available bank balance
- Disbursement float only affects the book balance, not the bank balance
Correct answer: Disbursement float increases the available bank balance above the book balance
Disbursement float (checks written but not yet cleared) means the bank hasn't deducted funds yet, so the available bank balance exceeds the book balance.
CTP Corporate Liquidity and Cash Management 3
A treasury department uses a lockbox network to accelerate collections.
The PRIMARY benefit of a lockbox system is: