CCM Investment and Short-Term Financing

Question 1

What is the main objective of short-term investing in treasury management?

Accepted Answer

To preserve capital and maintain liquidity

Answer

The primary objective of short-term investing in treasury management is not to maximize returns, but to ensure the safety of the principal (preserve capital) and readily access funds when needed (maintain liquidity). Companies invest surplus cash in highly liquid, low-risk instruments to meet immediate operational needs and unexpected expenses. This conservative approach prioritizes financial stability over aggressive growth.

Question 2

Which instrument is considered a safe short-term investment?

Accepted Answer

Treasury bills

Answer

Treasury bills (T-bills) are short-term debt instruments issued by the U.S. government. They are considered one of the safest short-term investments because they are backed by the full faith and credit of the U.S. government, carrying virtually no default risk. Their short maturity also contributes to their low-risk profile, making them ideal for capital preservation.

Question 3

What is a key advantage of using a revolving line of credit for short-term financing?

Accepted Answer

Flexible access to short-term funding

Answer

A revolving line of credit provides companies with flexible access to short-term funding up to a pre-approved limit. Unlike a term loan, funds can be borrowed, repaid, and re-borrowed as needed, making it ideal for managing fluctuating working capital needs. This flexibility allows companies to draw funds only when necessary, minimizing interest expenses.

Question 4

Which of the following best describes commercial paper?

Accepted Answer

Unsecured short-term corporate debt

Answer

Commercial paper is an unsecured promissory note issued by large, creditworthy corporations to raise short-term funds. It is typically issued at a discount and matures in 270 days or less. Being unsecured, its issuance relies heavily on the issuer's credit rating, making it a cost-effective way for strong companies to access short-term capital without collateral.

Question 5

Why might a company choose factoring as a short-term financing option?

Accepted Answer

To convert receivables into cash quickly

Answer

Factoring is a financial transaction where a company sells its accounts receivable to a third party (the factor) at a discount. This allows the company to receive immediate cash for its invoices, rather than waiting for customers to pay. It's a useful option for companies needing to improve their cash flow quickly, especially those with long payment terms or limited access to traditional credit.

(CCM) Certified Cash Manager Practice Test

(CCM) Certified Cash Manager Practice Test

CCM Investment and Short-Term Financing