CFM CFM Treasury & Cash Management 2 — Questions and Answers
Question 1: Which financial instrument allows a company to hedge against rising interest rates on a floating-rate loan?
- Interest rate swap (pay-fixed, receive-floating) (Correct answer)
- Currency forward contract
- Commodity futures
- Equity put option
Correct answer: Interest rate swap (pay-fixed, receive-floating)
In a pay-fixed, receive-floating interest rate swap, the company pays a fixed rate and receives the floating rate, effectively converting variable loan costs to fixed costs.
Question 2: What is the purpose of a revolving credit facility for a corporation?
- To permanently finance long-term capital assets
- To provide flexible short-term borrowing capacity that can be drawn and repaid repeatedly (Correct answer)
- To issue equity to shareholders
- To establish a foreign exchange hedging program
Correct answer: To provide flexible short-term borrowing capacity that can be drawn and repaid repeatedly
A revolving credit facility (revolver) gives companies the ability to borrow up to a set limit, repay, and re-borrow as needed, providing flexible liquidity support.
Question 3: When evaluating short-term investment options, a CFM should prioritize which three characteristics in order?
- Return, liquidity, safety
- Safety, liquidity, return (Correct answer)
- Liquidity, safety, return
- Return, safety, liquidity
Correct answer: Safety, liquidity, return
For corporate treasury, preserving capital (safety) comes first, followed by the ability to access funds quickly (liquidity), with return as a secondary objective.
Question 4: What is the net present value (NPV) of a $10,000 cash inflow received one year from now at a 5% discount rate?
- $9,524 (Correct answer)
- $10,500
- $9,000
- $10,000
Correct answer: $9,524
NPV = $10,000 / (1 + 0.05) = $9,523.81, rounded to $9,524, representing today's value of that future cash flow.
Question 5: Which ratio best indicates a company's ability to meet its most immediate obligations without relying on inventory?
- Current ratio
- Quick ratio (acid-test ratio) (Correct answer)
- Cash ratio
- Operating ratio
Correct answer: Quick ratio (acid-test ratio)
The quick ratio (cash + marketable securities + receivables) / current liabilities excludes inventory, providing a more stringent test of immediate liquidity.
Question 6: What is the key risk associated with investing excess corporate cash in commercial paper?
- Market risk from equity price fluctuations
- Credit risk if the issuer defaults before maturity (Correct answer)
- Interest rate risk from long-duration exposure
- Currency risk from foreign denomination
Correct answer: Credit risk if the issuer defaults before maturity
Commercial paper is unsecured short-term debt, so if the issuing corporation defaults, investors may lose principal, making credit quality assessment essential.
CFM CFM Treasury & Cash Management 2
Which financial instrument allows a company to hedge against rising interest rates on a floating-rate loan?