TM - Final Textbook Chapters

types of parties involved in payment transactions:

- B2B - B2C - C2B - C2C , or P2P - C2G - B2G - G2B - G2C

Barter and countertrade

- Barter involves the direct exchange of goods or services between two parties without the exchange of money. ---> frequently used when funds cannot be repatriated due to currency controls or other legal limitations. - Countertrade is similar to barter but is used by firms that do not use currencies that are internationally traded to pay for imports from other countries. ---> for example, an exporter ships merchandise to the counter trading country. In exchange, it takes merchandise that may be sold elsewhere in the world. Pricing and foreign exchange rates are established between the trading parties. This differs from barter in that the exporter is receiving valuable goods for resale locally to recoup its costs rather than a product that it intends to keep and use for its own purposes.

payor

sends a payment and the payor's account is debited (decreased) for the value of the transaction.

broker-dealers

serve as intermediaries in the purchase and sale of capital market securities. - provide several key roles: ---> investment bankers assist issuers in the design and placement of securities issuances. this typically includes underwriting the initial offering. ---> originators (i.e., origination desks) are a subset of trading professionals tasked with evaluating, pricing, and underwriting the initial offering. ---> securities traders maintain active, orderly secondary markets for equity and debt instruments.

cross-border transfers

settlement is handled using correspondent accounts. - in a correspondent banking relationship, two banks have accounts with each other for the purpose of clearing and settlement payments. ---> these correspondent relationships may be reciprocal or one-way.

domestic transfers

settlement is often handled between the banks using common accounts held at their central bank. - the parties involved are in the same country

Government paper

short-term promissory notes issued by national, state, and local government agencies as a means to raise funds in the money market. - the market for most countries' government paper is liquid and highly active, due to the government's backing. - the yields on government paper tend to be lower than other instruments of comparable maturity because of the lower default risk. ---> most cases, issued on a discount basis. - a variety of maturities are available, depending on the government's borrowing requirements, allowing investors to closely match their liquidity requirements. - UK gilts, US treasuries, German bunds, and Japanese government bonds (JGBs) are examples of sovereign government bonds. - while US Treasury include Treasury bills, notes, and bonds, only those maturing within one year are classified as money market instruments. - T-bills

Signature based

signature debit cards bear the logos of Visa, MasterCard, or Discover, and are processed in the same manner as credit card transactions using those network operators. - the customers sign a receipt at checkout.

trade acceptance

similar to a BA except it is drawn on, and accepted by, an importer. - can be used to verify an importer's obligation to pay for purchased merchandise where the exporter is satisfied with the credit risk. - often are used by importers to secure financing from a bank or, similar to BAs, may even be sold to a bank or an investor at a discount prior to maturity.

freight payments

specialists pay all of a shipper's freight bills, audit bills for possible overcharges and duplicate payments, and provide reports that help a company compare costs for different routes and carriers. - manufacturers and wholesale distributors typically use this service.

control

the concept is to eliminate fraud and ensure that payments are received at the right time.

Annualized Cost of CP =

( (Dollar Discount + Dealer Fee + Backup L/C Fee) / Usable Funds ) x (365/Days to Maturity)

portfolio return =

(% invested in Stock A x Return on Stock A) + (% Invested in Stock B x Return on Stock B)

portfolio beta =

(% of Co. X Stock * % of Co. X Beta) + (% of Co. Y Stock * % of Co. Y Beta)

BEY =

((Cash Received at Maturity - Amount Invested) / Amount Invested) x (365/Days to Maturity) - BEY = MMY x (365/360)

MMY =

((Cash Received at Maturity - Amount Invested) / Amount invested) x (360/Days to Maturity) - MMY = BEY x (360/365)

B2C (Business-to-consumer)

Payments move funds from businesses to consumers or individuals. - an example of this payment is payroll.

Which describes a scorecard?

Provides feedback on perceived value and quality versus cost of services

Price of Preferred Stock =

(Annual Preferred Stock Dividend) / (Required Rate of Return)

valuation of capital markets, PV0 =

(CF1 / (1 + k)^1) + (CF2 / (1 + k)^2) + (CFn / (1 + k)^n)

Holding Period Yield (HPY) =

(Cash Received at Maturity - Amount Invested) / Amount Invested

Discount Rate =

(Dollar Discount / Par Value) x (360/Days to Maturity) - The dollar discount divided by the par value and then annualized using a 360-day year.

CP Nominal Yield =

(Dollar Discount/Purchase Price) x (365/Days to Maturity)

Price of Common Stock in Period t =

(Dt+1) / (k - g) - k represents the required rate of return - g represents the growth rate in dividends

Annualized Cost of the Line (formula 2) =

(Interest + Fee on the Unused Portion of the Line) / (Used Portion of the Line - Compensating Balance) - the compensating balance requirement means that the firm will borrow more than it needs in usable funds.

Annualized Cost of the Line =

(Interest + Fee on the Unused Portion of the Line) / Used Portion of the Line

Break-Even Minimum Transfer =

(Wire Cost - ACH Cost) / (Days Accelerated x (Opportunity cost/365) ) - opportunity cost is either the short-term investment rate or a short-term borrowing rate.

additional paper-based instruments:

- cashier's check/certified check - government warrants - money order - payable through draft (PTD) - Remotely created check (RCC) - sight draft/time draft - traveler's check

External theft/fraud risk

- (Risk) Payment process (e.g., false invoices): (result) A/P controls: positive pay, debit blocks/filters, authorization process, segregation of duties. - (Risk) Check fraud: (result) Replacing paper-based payments with electronic payments. - (Risk) ACH network fraud: (result) Debit blocks/filters, daily ACH reconciliation, timely ACH returns. - (Risk) Breach or compromise of databases: (result) Physical and electronic security. (Risk) Malfeasance: (result) Corporate culture, ethical directives, strict code of conduct - (Risk) Robbery or theft: (result) Armored car services, automated safes

Long-Term Debt Financing

- Cost of debt ---> Cheaper than equity - Tax benefits ---> Tax shield (deductible interest) - Efficient debt markets ---> Broad range of risk and repayment characteristics - Restrictions on management flexibility ---> Principal and interest ---> Liens - Monitoring requirements ---> Covenant and reporting

Stock Issuance or Retained Earnings

- Cost of equity ---> Risk = expensive source - Managerial flexibility ---> Optional dividends ---> Does not mature - Voting rights - Cost of issuance - Earnings dilution - Retained earnings ---> Cheaper than new stock

basics of an RFP:

- Define the Objective - Determine the Business Requirements - Develop the Project Plan

equity securities

- Common stock - Preferred stock - Hybrid securities ---> Convertibles ---> Warrants - Depository receipts (DRs)

factors involved in pricing of loans:

- Cost of funds - Credit rating - Total loans committed and outstanding - Service fees - Deposit balances maintained - Range of services used (e.g., foreign currency or derivatives trading) - loan maturity - revenue size and importance of the overall relationship to the lending institution - competition

factors in using debt financing

- Credit enhancements - Guarantees - Bond/credit ratings - Maturity matching - Effects of interest rate levels and forecasts - Availability of collateral

debt contract provisions:

- Debt indentures and covenants - Representations and warranties - Events of default ----> Cure periods ---> Remedies ---> Waivers of default - MAC clause - Call and put provisions - Sinking funds - Refinancing - Defeasance of debt - Promissory note - Collateral - Liens

When examining an organization's overall enterprise risk, there are many types of risk that must be considered:

- Direct Responsibility of Treasury: ---> Market Risk ---> Credit Risk ---> Liquidity Risk - Other Types of Risk: ---> Operational Risk ---> Legal and Regulatory Compliance Risk ---> Event Risk ---> Business Risk ---> Strategic Risk ---> Reputation Risk

Disaster Recovery and Business Continuity

- Disaster recovery refers to the restoration of systems and communications after an event causes an outage. - Business continuity refers to the actions taken with regards to crisis management, alternative operating procedures, and communications to staff and customers. - Financial Parties: ---> Internal recourses: include treasury staff, computer systems, policies, procedures, processes, and other facilities. ---> External financial counter parties: Include financial institutions, market information providers, vendors, and financial markets. ---> Infrastructure: The infrastructure linking the two must be well designed and should include both internal and external networks, such as computers, servers, telecommunications, utilities, and vendor support services.

advantages of going public

- Diversification for owners - increased liquidity - Increased transparency - improved ability to spin off divisions

Approximate % Change in Bond Price =

- Duration x Change in Interest Rate

non-cash payment system types include:

- checks or drafts - RTGS (wire) - small-venue electronic payments (ACH) - card-based payments - emerging payments

Purpose of risk management

- Identify future events creating uncertainty. - Economic/regulatory effects of negative possibilities. - Guide recovery when serious negative events occur. - Costs to mitigate or eliminate

Cost of debt

- Interest on a bond over its life = YTM - After-tax cost of debt: YTM of most recent bond issue adjusted for tax-deductible interest - The YTM is the return that investors currently demand for a given bond investment.

Operational Risk Management

- Internal Risks ---> employee ---> process ---> technology - External Risks ---> financial institutions ---> counter party ---> legal and regulatory compliance ---> supplier ---> external theft/fraud ---> physical and electronic security ---> natural disaster ---> terrorism

IP

- Is the first adjustment to the real rate of inflation, as lenders want to maintain the purchasing power of the money they lend to borrowers. - the sum of the real risk-free rate and the inflation premium is commonly referred to as the nominal rate.

procedure development process and implementation

- It is important to understand that policies drive the development of day-to-day procedures (often referred to as standard operating procedures, or SOPs). ---> At the same time, procedures reinforce compliance with the policy. ---> An organization should make this relationship explicit by tying procedures to their underlying policies. - Management should also communicate how those procedures help the organization achieve its goals or strategic plan, and should ensure understanding and compliance on the part of managers and employers. - the managers and employees affected should be involved in developing the procedures, as this will create a sense of ownership and, it is hoped, better compliance.

Legal/Regulatory and Sovereign Risks

- Lawsuits or other legal actions - Growth of governmental regulations ---> Terrorism and anti-money laundering ---> Understand and comply with each jurisdiction - Sovereign risk --->Expropriation --->Loss of foreign asset value ---> Tax risk

primary differences among lease types:

- Length of lease period - Party responsible for maintenance and upkeep - Residual value of asset (i.e., the estimated value of the asset at the end of the lease) - Relevant tax treatment (differs for not-for-profits and municipalities) - Who retains assets at end of lease and lease terms

Raising capital through the private placement of securities may be preferred over public issuance due to:

- Less restrictive covenants - Relatively small issue size - Reduced time to issuance - Fewer reporting and disclosure requirements - Lower costs - Control over who holds the debt - Flexibility of terms and maturities

criteria for selecting an issuer

- Long-term solvency of the insurer - Rating for the insurer ---> A.M. Best ratings ---> Best's Financial Strength Ratings ---> Best's Issuer Credit Ratings - Service provided - Cost versus exposure - Industry knowledge and experience

managing outstanding capital

- Manage trustee relationships. - Once the debt or equity securities have been issued, the payment requirements accompanying each security must be managed. ---> To meet this need, treasury professionals must often manage trustee relationships and responsibilities relative to the securities, as well as act as a disbursing agent for shareholder or bondholder payments. ---> Shareholders may receive dividends as declared for preferred and common stock. ---> Meanwhile, bondholders may receive interest and principal payments. - In addition to its trustee and disbursing responsibilities, the treasury department may be involved with investor relations, including such responsibilities as: ---> participating in presentations to potential investors to raise capital (known as road shows) ---> maintaining shareholder lists ---> sending out financial statements, annual reports, and other required filings ---> communicating with shareholders and bondholders ---> addressing investors' questions

Dividend Reinvestment Plans (DRIPs)

- May be used to allow investors to increase their ownership of the firm's shares. - enables existing shareholders to purchase additional shares directly from the firm on a when-desired basis, normally with no commission or with only a small processing charge. - allow investors to reinvest dividends automatically in additional shares. - shares that the firm distributes under these plans may be held in the treasury (i.e., treasury stock), be repurchased by the company in the market and intended for this purpose, or be new, authorized shares of stock that have not been issued yet (i.e., shelf-registered stock). - benefit smaller shareholders because transaction costs are low or nonexistent. - one negative aspect of these, is that they may increase the number of small shareholders, resulting in more expensive investor relations through an increased cost of maintaining shareholder records.

types of common stock

- Often only one class - Classes may limit ---> Voting privileges ---> Dividends ---> Resales - Tracking stock: is a separate stock created by a parent company to track the financial progress of a particular line of business. (do not provide ownership or voting rights) - Spider (SPDR): an exchange traded fund (EFT) that mirrors the returns of the S&P 500 index.

policy reviews, updates, and revisions

- Policies should be reviewed, updated, and reap-proved periodically, driven by the internal protocol, the regulatory environment, and the size and type of the organization. ---> The structure of the review and the level of review required should be outlined in this policy. - A good practice is to include a revision-tracking section as part of the document. This should list all changes and updates in order to provide historical context and document any necessary regulatory compliance. - Policies should also be reevaluated and updated immediately following any major reorganization of the company's structure, material change in banking services, or relevant regulatory change. - Policy compliance reviews are also important to the success of the policy. ---> These reviews may be included within the scope of internal and/or external audits, but practice may vary by the type and size of the organization. The policy should clearly specify who is responsible for compliance testing, the scope of the testing, and to whom the results should be reported. - to ensure adequate compliance evaluation, many organizations assign compliance measurement to a specific person or unit outside the policy-related functional area. This is generally considered a best practice, as it ensures objectives in the review process.

payments fraud control practices:

- Positive pay, ACH filters and blocks, and daily reconciliations are among the methods most used to help detect and control payments fraud. - Use of check stock with built-in security features, such as microprinting, holograms, and other non-photo reproducible features. - Appropriate segregation of duties so that the person reconciling accounts is not the person who can initiate transactions from the account. - The use of dual authentication for all EFT transactions, where one person originates a transaction and a second person reviews and releases the transaction. - The reduction or elimination of non-repetitive wires. - The use of separate accounts for deposits and disbursements. - Specific-purpose deposit-only ZBA accounts with debit blocks or filters. - Check blocks for ACH-only ZBA accounts. - The use of a dedicated computer (i.e., not used for other purposes) for the initiation of online EFT transactions.

insurance management - types of losses:

- Property loss (e.g., from internal or external theft) - Business interruption or net income loss - Surety or breach of contract loss (e.g., from a contractor's failure to perform) - Liability loss (e.g., lawsuits from injured customers) - Personnel loss (e.g., loss of the president or other key employees) - Workers' compensation claims - Cyberrisk loss (e.g., loss caused by data or network security breach)

alternatives to an RFP include:

- RFI - RFQ

disadvantages of going public

- Regulatory disclosure - Managerial flexibility - Control - Exposure to market conditions ---> Industry or market issue could create takeover risk

Step 2 of Risk Management Process: Identify Potential Exposures

- Risk exposure in all areas of the organization need to be identified clearly both in terms of their likelihood (i.e., probability of occurrence) and their potential impact on the organization. ---> For example, financial risks such as interest rate variations, foreign exchange (FX) rate changes, or fluctuations in commodity prices will vary depending on the industry and form of the business organization or government agency. ---> Operational risk is also an important considerations, especially for organizations with significant treasury operations. - Timely and accurate exposure info is critical for effective risk management. - A company's risk profile refers to how the company's overall value changes as the price of financial variables changes. ---> The basic risk profile for a public company shows how the firm's earnings per share, common stock price, or overall value responds to changes in interest rates, FX rates, or commodity prices. - The risk profile is an important tool used to identify key areas of exposure. Specifically, a risk profile analysis identifies the risks, classifies each risk into clearly defined categories, and quantifies the risks with respect to the probability of occurrence as well as the financial impact. ---> The analysis can be used to evaluate the effectiveness of the risk reduction measures that are employes. In some organizations, this process is known as a risk self-assessment. (often called RCSAs, risk and control/self-assessments).

Technology risks (powerpoint)

- Security breaches ---> Internal ---> External - Platform or vendor ---> After-sale installation and support ---> Vendor may go out of business - Failure of vendor-acquired ---> Hardware ---> Software ---> Communications devices - Capabilities, capacity, compatibility - Spreadsheets: ---> Mission-critical? ---> Difficult to audit ---> Avenue for mistakes, file corruption, fraud

5 common types of MMFs in the US:

- US Treasury funds - government funds - institutional prime funds - institutional municipal/tax-exempt funds - retail funds

TMS functionality

- cash management - bank communications - payments - debt and investment transactions - accounting and G/L interfaces - bank account management - reporting - risk management - cash flow forecasting and liquidity planning - invoice management - dashboards - in-house banking

provisions of preferred stock to attract investors:

- Voting rights under certain conditions - Share in earnings above certain level - Sinking funds to redeem - Maturity dates - Exchange or call provisions

treasury management systems

- cash management - payments - debt/investment transactions - accounting - bank account management

cashier's check/certified check

- a cashier's check, also known as an official bank check, is a check drawn on a bank's funds. - a certified check is drawn on a depositor's checking account, and funds are withdrawn from the depositor's account at the time of certification, to assure payment with a certification or guarantee by the bank. - both carry the signature of a bank officer certifying the check to be genuine and guaranteeing payment. - due to higher processing costs of certified checks, most banks have replaced them with cashier's checks.

Auxiliary On-US field

- an 8 digit field used on business checks. - this number is frequently the check number. - it assists the drawee bank in providing a variety of account reconciliation services. - it s a key in providing stop payment and positive pay services. - it is necessary to prevent check conversion.

debt indentures and covenants

- an indenture is a legal document that outlines the rights and obligations of the borrower and the creditor. - this contract includes various restrictive covenants that impose constraints on the actions of management, - covenants may be negatives (exp: actions the company cannot take, such as the double pledging of collateral) or affirmative actions (exp: actions the company must take, such as providing regular financial statements or maintaining certain financial ratios.

account analysis terminology

- average ledger balance - average deposit float - average collected balance - reserve requirement - FDIC fees - service charges - available or investable balance - Earnings credit allowance and the ECR

factors influencing the target capital structure

- business and financial risk - asset structure - shareholder control and dilution - profitability - market conditions - lender and rating agency considerations - regulatory restrictions and minimum capital requirements

short-term investment strategies

- buy-and-hold-to-maturity strategy - actively managed portfolio strategy - tax-based strategy

call and put provisions

- call provisions give the issuer the right to call a bond or other security for redemption prior to the original maturity. ---> call premium is generally paid when a bond is called. ---> call privilege is valuable to an issuer because it allows redemption of a bond if interest rates fall and refinancing becomes an attractive option, or if the issuer wishes to retire the debt before maturity for other reasons. - a put provision allows the investor to force the issuer to repurchase the debt at specified dates. ---> the put provision generally provides that the debt will be redeemed at par, creating a floor price for the debt and providing greater security for the holder.

participants in a credit card transaction

- cardholder - card issuer - merchant - merchant acquirer - acquiring processor - issuer processor - network operator

different types of dividends

- cash dividends - stock dividends - special dividends - liquidating dividends - stock splits

short-term investment yield is a function of the:

- cash flows received from the investment - amount paid for that investment - maturity or holding period

Processing large-value electronic funds transfers involved two key elements:

- clearing: the transfer and confirmation of information between the payor's bank (sending FI) and the payee's bank (Receiving FI). - settlement: the actual transfer of funds between the banks, which discharges the payor's obligation to the payee. ---> final settlement is irrevocable and unconditional.

4 major clearing channels available in the U.S. for processing transit checks:

- clearinghouse - correspondent bank - direct send or direct exchange - federal reserve system (FED)

the elements of a service agreement often include:

- contract length and adjustments - information on funds availability - time frames during which errors must be reported - the right of offset against accounts resulting from fees owned - liability clauses defining responsibilities for specified risks - other terms and conditions of the relationship these conditions are often negotiable

shareholder rights

- control - cumulative voting - proxy - staggered election of directors - preemptive right

disadvantages associated with the private placement of securities:

- cost to locate appropriate investors - limited information about the company - investors' desire for more equity in exchange for assuming greater risk and lower liquidity

investment risk considerations

- credit or default risk - asset liquidity risk - price/interest rate risk - foreign exchange (FX) risk

capital markets are further divided into two markets:

- debt market: includes fixed-income capital, such as bonds and term loans. - equity market: includes shares of common and preferred stock.

dividend payment procedures

- declaration date - record date - ex-dividend date - payment date

project plan

- define objectives and develop project plan: 1 week - assemble project team: 2 weeks - develop business requirements: 2 weeks - obtain relevant transactions/use data: 4 weeks - develop account/systems architecture: 2 weeks - perform vendor scan: 2 weeks - create vendor long list: 1 week - determine RFP format: 1 week - develop RFP questions: 1 week - issue and administer RFP: 4-6 weeks - review and score proposals and pricing: 2 weeks - host vendor presentations: 1 week - select vendor: 1 week - implement project: 3-12 months

additional information security:

- encryption - digital signatures - digital certificates - token devices - single sign-on (SSO)

Fee Versus Balance Compensation: Company Perspective

- fee-compensation (lower account balances) may be preferred when short-term investments offer a higher yield than that provided by the ECR. The use of fees for compensation is even more compelling when the firm can use excess balances to pay down short-term debt, which is typically at a rate much higher than the ECR. - motives for balance compensation include: ---> balance compensation lets the firm take advantage of excess collected balances that arise from unanticipated deposits or precautionary transaction balances. ---> the potential exists for more favorable pricing for loans and other services if collected balances are maintained. ---> earnings credits are not taxable, whereas the return earned on many short-term investments is taxable. ---> ECRs may exceed available short-term investment rates.

tax strategies

- global tax strategy: ---> multinational firms need an effective global tax strategy or they risk incurring highly unfavorable tax consequences. ---> effective international tax planning can reduce taxes by minimizing the potential for double taxation. ---> an effective global tax strategy will balance home country and foreign tax considerations in the context of the firm's broader business and financial objectives. - international transfer pricing rules: ---> require firms to document their annual compliance with strict "arm's length" standards for the pricing of inter company transfers of goods and services. ---> another problem area is that of deemed dividends, where payments on loans, sales of stock, or other transactions may be interpreted by tax authorities as a corporate attempt to avoid paying taxes on dividends. - solid tax strategy: ---> proper international tax planning requires a global tax strategy that facilitates the firm's global business objectives. ---> the starting point is to develop a solid understanding of the firm's business and financial position, its international operating strategy, and where and how it intends to operate outside its home country. ---> with this knowledge, an overall global tax strategy can be developed. ---> international tax planning for specific situations can then be approached in a coherent manner, taking into account the firm's broader global tax and operating strategies.

special dividends

- if a firm has a one-time earnings spike, paying a higher dividend for just one period will send mixed signals to shareholders. It may also cause a false expectation that dividends were increased permanently, which eventually will negatively impact the stock price. - In such cases management may opt for a special dividend, in which the dividend is meant to be a one-time payment rather than an ongoing dividend increase.

convertibles disadvantages:

- if the stock price increases significantly during the convertible's life, then the company may have been better off issuing regular debt than refunding the debt with a new stock issue. - if the convertible issue has a low coupon rate, then that rate is lost if the holders convert the bonds into stock. - if the stock price does not rise, then a company may be locked into the debt issue, although it is typically at a lower coupon rate than regular debt.

benefits of e-commerce:

- improved productivity, thereby enhancing working capital management - reduced data reentry, thereby reducing error rates and enabling faster data processing. - the elimination of mail time, thereby enhancing cash flow processes - improved communication capabilities - the ability to perform straight-through processing (STP)

relationship management

- in some organizations, an employee within treasury is primarily responsible for relationship management. ---> in others this oversight rests directly with the treasurer. - in either case, relationship management entails many responsibilities ranging from day-to-day communication regarding transaction inquiries and problem resolution to quarterly, semiannual, and/or annual performance evaluations and relationship reviews based on agreed-upon metrics and objectives. - acceptable performance requires the FSP to have in-depth knowledge of he client's operations and needs. - changing providers consumes time, effort, and financial resources. - success in every long-term relationship involves mutual accommodation.

other bonds

- income bonds - collateral trust bonds - equipment trust certificates - index bonds - economic development bonds - tax increment financing (TIF) bonds - tender option bonds - multicurrency bonds - green bonds

typical information disclosed in the documentary collection letter is:

- name of the exporter - name and address of the importer - info regarding the collecting bank - details of the documentation accompanying the collection - date, tenor (i.e., length) and value of the collection - details of bank and other charges to be paid by the exporter, importer, or both. - recourse procedures in the event of nonacceptance or nonpayment. - any nonstandard terms or conditions.

major components of merchant card fees:

- interchange fees (referred to simply as interchange): represents a fee that is paid to the issuing bank for each transaction. - assessments: typically calculated as a percentage of the transaction amount and are set by the network operators (MasterCard, Visa) ---> Intended to reimburse the network operators for their services and for brand management. - processor fees or markups: set by individual card processor or merchant acquirer and are the fees charged to process the transaction on the merchant's behalf. ---> also referred to as transaction fees

corporations

- issue debt and equity securities - corporate entities, including financial institutions, raise capital through the sale of stocks and bonds. - corporations are major issuers of long-term debt in a variety of formats and maturities. - most corporate debt is in the form of three-to-ten year bond issues, although longer terms have historically been available. - term loans greater than a year are also a part of this market - on the equity side, corporations are the primary issuers of both preferred and common stock, which represent ownership in corporations.

mutual fund companies

- issue debt and equity securities - sell shares in many different types of funds that acquire money market, bond, or stock instruments. - do not represent a direct issuance of stocks and bonds held by the mutual fund sponsor. ---> rather they are shares sold by the fund itself, which holds aggregated securities, allowing smaller investors to easily diversify their investment.

state-owned enterprises

- issue debt securities - a state-owned enterprise (SOE) is a firm that is created by a national government in order to participate in or help support various commercial activities on the government's behalf. - can be either wholly or partially owned by a government and are common in many countries. - examples include freddie mac and fannie mae.

sub-sovereign entities

- issue debt securities - are governmental units within a country (e.g. states, countries, cities, and municipalities in the US) - borrow exclusively in the debt markets in many, but not all, countries in the US, interest paid to investors on such instruments is generally exempt from federal income taxation, which may make them more attractive to certain types of investors.

governments and central banks

- issue debt securities - these issues are usually: ---> 1. backed by the full faith and credit o the issuing government ---> 2. used to finance fiscal deficits ---> 3. issued through the ministry of finance or treasury department - central banks also issue their own securities to finance the acquisition of assets, particularly foreign exchange reserves.

money market participants

- issuers of money market securities include governments, securities dealers, commercial banks, and other corporations (including not for profits). - investors are lenders and issuers are borrowers. - a broker-dealer is an entity that trades securities for its own account or on behalf of its customers. ---> when executing trades on behalf of a customer, the institution acts as a broker. ---> when executing trades for its own account, the institution acts as a dealer. - primary markets: broker-dealers place the majority of new issues in this market. - secondary markets: broker-dealers provide these markets with liquidity necessary for outstanding issues. - when acting as dealers, these parties also take positions in securities so they can act as the counter party in the purchase and sale of transactions. (bid/ask)

financial markets are divided into two marketsL

- money markets: include issues with maturities of one year or less - capital markets: include issues with maturities extending beyond one year

types of long-term bonds

- mortgage bonds - debentures - convertible bonds - sovereign bonds - sub-sovereign bonds - eurobonds - zero-coupon bonds - floating-rate bonds - high-yield (junk) bonds

disadvantages of listing stock

- most organized exchanges have their own rules and regulations, typically reporting and governance requirements, that can go well beyond any government regulation of public companies. ---> Given these additional requirements and the higher costs charged by the exchanges, some firms remain in the OTC market rather than on an organized exchange. - Some firms voluntarily delist rather than comply with NYSE requirements.

The characteristics of equity financing via stock issuance or retained earnings include:

- the cost of equity - managerial flexibility - voting rights - costs of issuance - earnings dilution - retained earnings

basic elements of a policy:

- objectives - scope - basic guidelines - roles and responsibilities - performance measurement and reporting - required controls and compliance considerations - exception management - review cycle - definitions - policy attachments

elements of an SLA include:

- operational policies (including the detailed processing requirements for each service, a list of required information and related reports, a list of individuals authorized to make changes, and a description of the issue escalation and resolution process) - performance standards and calculations that define agreed-upon levels of service performance and quality.

4 primary reasons why treasury policies and procedures are necessary: (needs)

- organizational needs - risk management - roles and responsibilities - compliance

4 elements in the payment process

- payment instructions - payment generation - clearing - settlement

four-corner payment system model

- payor - payor's bank - payee or beneficiary - payee's bank

global concentration of funds

- physical pooling - notional pooling - bank overlay structure

advantages of listing stock

- primary advantage of listing a stock on one of the organized exchanges is to increase marketability. - listing can also result in higher sales for the firm in question because of increased public exposure. - additionally, the increased level of disclosure required for public listing has a tendency to reduce the firm's perceived market risk, which in turn may lower the WACC, thereby increasing overall firm value.

some of the more specific considerations in the development of procedures include the following:

- procedures should be written so that they are clear and understandable to both existing and new managers and employees. They should be written in a concise manner with a minimum of verbiage, and all acronyms and technical terms should be spelled out clearly. - procedures that are unnecessarily restrictive may limit their usefulness, so when feasible, they should offer alternatives. For example, a process that is highly automated should include alternative manual procedures in the event of a systems failure. - documentation should be factual and reviewed for accuracy. Where possible, information that may become quickly outdated should not be included in the procedures. - Where applicable, the procedures manual should include step-by-step instructions for completing ant required forms (both paper and electronic). - The procedures document itself should be structures so that users can focus quickly on the aspect of the procedure relevant to their decision/task at hand. Many organizations use a flexible, modular outline to make the document easy to modify and keep up to date.

other forms of debt capital

- project financing - securitization - off-balance-sheet financing

with regards to information management, the treasury professional is commonly responsible for:

- protecting financial assets - compiling data from a wide range of internal and external sources - sorting, analyzing, and storing information - initiating and validating transactions - obtaining account balances and transaction details from external sources - obtaining internal information that affects the cash flow timeline (e.g., receipts and disbursements) - consolidating information into the cash position worksheet - creating forecasts - generating journal entries for accounting - reporting information to management - assisting other areas with any treasury-related research

other varieties of payment cards:

- purchasing cards - travel and entertainment (T&E) cards - fleet cards - ghost cards or virtual cards - departmental (unnamed cards) - single-use cards - stored-value cards (SVCs)

basic components of interest rates

- r*rf = real risk-free rate of interest - IP = inflation premium - DP = default premium - LP = liquidity premium - MP = Maturity premium

lockbox advantages over an internal company payment-processing center:

- reduced mail and processing float - improved access to remittance information - reduced information float - reduced risk and improved security since payments are no longer received internally. - improved control and record-keeping capabilities - uninterrupted service - scalability - proper segregation of duties

The items listed below are typically included in covenants. Which is another of these items? •Assets involved •Use of second mortgages •Sinking fund, reporting, ratio requirements •Prepayment terms •Restrictions on dividend policy

- right to issue additional debt

managing the bond portfolio

- risk refers to the possibility that actual results may differ from expected results. - bonds are generally considered less risky than equity investments. - interest rate volatility is one of the key risks associated with investments in bonds

key issues that treasury professionals should consider when determining their capital market investment objectives include:

- risk tolerance - return objective - liquidity needs - time horizons of future needs for funds - tax issues - asset/liability matching - legal or regulatory factors (especially for pension fund investments)

types of leases

- sale-and-leaseback - operating leases - capital leases

2 of the most common types of performance measurement techniques:

- scorecards (i.e., report cards) - relationship reviews

major drawbacks of spreadsheets:

- security limitations - potential for logic and formula errors - lack of auditability - poor version control - minimal integration with other applications - lack of organized information technology support and software maintenance - potential for corruption of data and internal formulas - lack of a common database, leading to duplication of data - lack of transaction initiation capabilities

techniques used to measure risk & evaluate the potential financial impact of certain firm-level risks:

- sensitivity analysis - scenario analysis - value at risk (VAR) - cash flow at risk (CaR) - Monte Carlo simulation

Fee Versus Balance Compensation: Bank Perspective

- some banks prefer fee compensation because deposit balances increase the liabilities on their balance sheet. - this may lead to a need for additional capital to meet regulatory requirements. - a second reason why banks often prefer fee compensation is that fees from deposit services are viewed as a low-risk source of earnings. - the principal reason why a bank may prefer balance compensation is that deposits may be used to fund loans and investments at rates exceeding the ECR provided to an account holder.

types of IT solutions

- spreadsheets - bank portals/online banking - TMS - ERP systems - dashboards

typical covenants outline:

- the assets involved - the right of an organization to issue additional debt - the use of second or junior mortgages - sinking fund requirements - reporting requirements - restrictions involving key financial ratios and liquidity - prepayment terms - restrictions on dividend policy

The characteristics of long-term debt financing include:

- the cost of debt - tax benefits of debt - efficiency of debt markets - restrictions on managerial flexibility - monitoring requirements

2 check deposit-related deadlines established by banks that determine when funds become available:

- the ledger cutoff time - the deposit deadline

two yields that are commonly quoted for short-term investments include:

- the money market yield (MMY): based on a 360-day year. - the bond equivalent yield (BEY): based on a 365-day year. - Key difference in the determination of these yields is the number of days used in the calculations. - the MMY and BEY will always exceed the discount rate because the holding period yield is calculated using the purchase price, which is less than par value, whereas the discount rate calculation uses par value.

taxes on dividends

- there are numerous tax considerations for dividend payments, mainly impacting recipients. - for the average investor, dividends are usually taxable income and may be taxed at a different rate than capital gains. - in some countries, tax rates on dividends received by corporations may be adjusted to reduce the potential double-taxation effect on those dividends. - tax regulations on dividends change constantly, and tax experts should be consulted for the latest information.

check-based payments

- they are initially captured via scanning or reader/sorter, and then the checks and/or images are then sorted by the collecting or payee's bank according to the rules of the country's checking system and the clearing channel used to collect the payments. ---> then they are sent through the clearing channel as cash letters. - historically, for settlement to occur, the original check had to be presented to, and accepted by, the bank on which the check was drawn, referred to as the paying bank. ---> this situation has changed in many countries with the introduction of image check processing, which has largely replaced the exchange of physical checks with the exchange of check images, such as RDC. - Regardless of whether the check is paper or an image, value is subtracted from the paying bank's account at the the of presentment through a central bank, a correspondent bank, or some other clearing channel. ---> Following presentment, the paying bank posts the check to the payor's account. ---> Most check processing is automated, and banks rely on account holders to report fraudulent checks, forged endorsements, and alterations. - The paying bank has a limited period of time to conduct a review of the paid check/image and either authorize final payment, or refuse payment and return the check to the bank of first deposit.

factors affecting bond duration

- time to maturity - coupon rate

factors that pricing of depository and cash management services is based on:

- transaction Volume - Customization - Exception-handling requirements - Cost of providing the service - operational Overhead - Deposit balances maintained - value of other services used (e.g., global trade services, letters of credit, and custody services) - credit relationship - revenue size and importance of the overall relationships to the bank

payments can be differentiated based on:

- type of payment system - the parties involved

Discount =

1 - (1 / (1 + TD(r/365)) )

Disaster recovery plan

1 identify mission-critical functions 2. assess risks 3. evaluate contingency plans 4. prioritize corrective action 5. create a communication plan

the risk management process involves six steps:

1. Determine the organization's risk tolerance. 2. Identify potential exposure. 3. Quantify the impact and level of exposures. 4. Develop and Implement an appropriate risk management strategy to manage those exposures. 5. Monitor the exposures and evaluate the effectiveness of the strategy. 6. Review and modify the strategy as needed.

steps to calculate duration:

1. calculate the present value of each annual cash flow generated by the bond. 2. multiply the values from step 1 by the year in which the cash flow occurs. 3. divide each product from step 2 by the bond price. 4. sum the values from step 3.

`4 objectives to insurance management:

1. insure against catastrophic loss 2. decide when and what to insure 3. manage the purchase and use of insurance 4. Obtain efficient pricing for insurance needs. - insured losses may still result in lost profits.

CB (Average Collected Balance)

= average ledger balance - deposit float

sight draft/time draft

A Sight Draft is usually presented in combination with other documents that verify the terms of a transaction have been met. ---> if all the documentation is in order then the draft is payable upon presentment (i.e., at sight). A Time Draft is the same as a sight draft except it is not payable until a specified future date. ---> time drafts are used for transactions that call for delayed payment. - sight and time drafts are used primarily to support international trade.

Which is a LIBOR- or Euribor-based investment with 1+-year typical maturities but a wider bid-offer spread, so regular trading can erode its yield advantage quickly?

Floating rate notes (FRNs)

Clearing House Interbank Payment System (CHIPS)

A US-based privately owned wire transfer that settles its transactions through the FED. - handles both the transmission of funds transfer instruction messages among banks, as well as the settlement of the payment between the banks, and is an RTGS system that provides finality. - one of the main electronic funds transfer systems for processing international US dollar funds transfers made among international banks in the US. - to assess this, a bank must have a US presence.

Controlled disbursement

A bank service that provides same-day notification to a company of the amount of checks that will clear against its disbursement account on a given day. - The amount of time it will take a check to be presented at a payor's bank can vary significantly due to such issues as mail and processing float. - allows companies to efficiently pay vendors and not leave existing balances in account. - companies have to manually ensure any shortfall is covered when coming into account. - With this, the account is typically not funded each day until after the daily notification is received. The daily clearings are normally available by early or mid-morning, allowing the treasury professional to more accurately determine the cash position. - Typically funded from a concentration account, in which case an automatic internal bank transfer is made. ---> This is usually accomplished by setting up controlled disbursement accounts as ZBAs. - For risk control purposes, most banks require that controlled disbursement accounts be funded either from another account at the same bank or by wire transfer. - One of the principal advantages of this account is that it allows the treasury department to calculate the daily cash position early enough to take advantage of better market rates for investing or borrowing.

Asset Allocation

A careful analysis of the investor's risk tolerance is a starting point for determining the optimal asset allocation. - After determining the risk tolerance, the investor's return objective should be considered. - The return objective may be stated in terms of: ---> an absolute return, such as an annualized return of 2.5%. ---> a general goal (e.g., current income, capital appreciation, capital preservation, or total return) ---> a relative benchmark return, such as exceeding the return on 10-year US Treasuries by 50 basis points. - The firm's liquidity needs will also influence the asset allocation decision. A firm that will need cash from the portfolio in the near future will hold a higher percentage of short-term bonds, while a firm without near-term liquidity needs may allocate more capital to equities.

Revolving line of credit (revolver)

A committed line of credit, that is established for a specified period of time, often on a multiyear basis. - they are formal, contractual commitments with loan agreements, including covenants. - usually, there is a commitment fee on the unused portion, as well as a fee for use of the borrowing facility. - often feature short-term, fixed-rate funding options that offer fixed-rate loans for specified periods with penalties imposed for prepayment.

Insurance Management

A decision-making process that identifies the possible losses and determines if insurance should be purchase against the risk of that loss and how much insurance is needed. - use of insurance is a specific form of risk management in which financial protection or reimbursement for possible losses is purchased from another party.

Positive pay

A disbursement service used to combat payments fraud related to both checks and ACH. - With this service, the company transmits a file of payment information to the disbursement bank either at or before the time of the physical distribution of checks or anticipated ACH debits. - the bank matches check serial numbers and dollar amounts of checks presented for payment against the issue database and pays only those checks or ACH transactions that match all relevant criteria. - many positive pay services also offer the ability to match against the payee field, as well as the serial number and the amount, in an effort to detect an altered payee. - in the case of ACH positive pay, transactions are matched based on dollar amount and originator.

Letter of credit (L/C)

A document issued by a bank, guaranteeing the payment of a customer's draft up to a stated amount for a specified period, provided certain conditions are met. - substitutes a bank's credit for that of the buyer, virtually eliminating the credit risk to the seller. - widely used method of payment for import and export shipments and are used frequently as a financing vehicle for cross-border trade transactions. - two types: commercial and standby

Preferred Stock

A hybrid security that has features of both debt and equity. - offers investors a steady stream of income via preferred dividends, much like the coupon payments offered o bonds. - the annual preferred dividend is stated as a percentage of the preferred stock's par value, but it is distributed in quarterly installments. Like debt, preferred stock has a claim above common stock in both going concern and liquidation situations. - preferred stock is like common equity in that bankruptcy is not a possible consequence of missing a dividend payment. - viewed as a perpetuity - the market price of preferred stock falls when the required rate of return increases.

annual cost for a line of credit

A line of credit lender will typically charge interest on funds borrowed and charge a commitment fee on the line on an annual basis. - Interest is charged on the used portion of the line. - The commitment fee may be charged on the entire line or just its unused portion. - The overall interest rate on the credit line is determined by the total interest paid on the line's used portion and the amount paid for the commitment fee relative to the average used portion of the credit line over the borrowing period.

Payable through Draft (PTD)

A payment instrument resembling a check that is drawn against the payor rather than the bank. - it is handled like a check through the clearing process, but the responsibility for paying the draft lies with the payor, referred to as the drawee in the case of drafts. - the primary reason companies use drafts is to preserve the right to review the items prior to final payment. - insurance companies often use this type of instrument for claims reimbursement because drafts provide insurers with an opportunity to verify signatures and endorsements before honoring the items.

Yield Curve

A plot of the yields to maturity on the same investment instrument or class of instruments, but with varying maturities, as of a specific date. - the slope, or shape, of the yield curve at a point in time has decision implications for those managing the short-term investment portfolio. Since short-term rates are typically lower than long-term rates, an upward-sloping yield curve is referred to as a normal yield curve. - a downward-sloping yield curve is referred to as an inverted yield curve. - an inverted yield curve is typically a sign that the market is expecting a recession in the near future and is investing in longer-term securities to attempt to lock in interest rates or avoid any reduced interest rate that may occur in the short run.

MICR line (magnetic ink character recognition)

A specially formatted line of machine-readable information on the bottom of a check that contains all the information necessary to process the check through the check-clearing system. - it is called this because it is printed with a special magnetic ink used for magnetic ink character recognition.

Supply Chain Finance

A supplier receives loans based upon the credit rating and financial capabilities of its customer (i.e., the buying firm). - Typically arranged for by the buying firm rather than the supplier and allows the buying firm to extend its payables while providing lower-cost financing for its supplier. - Using supply chain finances, invoices are approved by the buyer when received. - suppliers also have the option to receive a discounted amount prior to maturity. - the primary advantage for the suppliers is that the invoices are discounted at a rate tied to the buyer's cost of capital. ---> this rate may be much lower than the supplier's cost of capital, providing relatively low-cost financing for the supplier's accounts receivables.

Buy-and-hold-to-maturity strategy

A traditional strategy for investing excess cash and preserving capital is to (1) invest only in securities whose maturities can be expected to sufficiently fund any potential cash needs, (2) hold those securities to maturity, and (3) reinvest only if maturity proceeds are not needed for expenditures. - a passive investment approach that might be favorable to conservative investors. - the main advantages are that funding needs are always met, as long as the securities are structured or laddered properly to meet cash needs, and interim price fluctuations can largely be ignored since the maturity will always fulfill the investment's initial return expectation. - referred to as a matching strategy: this stems from the fact that cash flows from maturing investments can be matched to future expenditures.

Credit Risk

A type of counter party risk. Its related to how a change in the credit quality of a company would affect the value of a security or portfolio of investments. - Default on an investment or security is the extreme case of credit risk, but downgrading of a security can also be an issue. - In some cases, the creditor may recover some value after default, and the amount recovered is called the recovery value or rate. ---> When given as a percentage, it is called the loss given default. - Arises both from transactions and from risk in the portfolio due to concentration of similar assets. (lack of portfolio diversification, when the assets in a portfolio are all concentrated in a single area, industry, or type of security.

CAPM

A widely accepted method for establishing a relationship between a common stock's required rate of return and its risk level. - the total risk associated with an equity investment can be broken down into idiosyncratic risk and systematic risk. - idiosyncratic risk is the result of events that affect a specific firm. - systematic risk is generated by macroeconomic events that effect all firms.

Account Analysis Standards

AFP Service Codes ---> have been recognized as the standard for identifying balances and charges that appear on account analysis statements and in responding to RFPs. ---> six-character, alphanumeric codes used by banks to provide standard, uniform references and terms for identifying, describing, and reporting bank services, as well as the associated charges. ASC X12 822 ---> Accredited Standards Committee X12 of the American National Standards Institute (ANSI) has developed a standardized format (Account Analysis Transactions Set 22) for financial institutions to use when sending account analysis statements to account holders electronically. ---> this transaction set accommodates the AFP standard account analysis formant and SFP Service codes.

Notional pooling

Accomplished by making balancing entries on a set of virtual accounts with no changes to the bank accounts held by company entities. - As there is no physical movement of money, inter company loans are not required to account for the notional transactions. - Banks usually require credit facilities to support any deficit balances in the pool, and notional pooling often requires extensive cross-guarantees among subsidiaries, which many firms find very difficult to implement. - some countries, including the US, Germany, Mexico, Japan, and Brazil, disallow notional pooling.

network

Additional parties and intermediaries that help facilitate the transaction within the four-corner payment system model. - includes central banks, and commercial entities such as the Clearing House Interbank Payment System information but do not provide funds settlement, and payment systems, which include information transmission capabilities and settlement.

Uncommitted line of credit

An agreement with a lender in which the lender offers to make funds available in the future but is not obligated to provide a specific amount. - usually, it is made available for a one-year period. - however, funding may be refused at the lender's discretion or cancelled outright, usually due to changes in the financial condition of the borrower. ---> Hence an uncommitted line is often called a discretionary line of credit. - There is typically no fee for an uncommitted line unless funds are actually borrowed.

integrated or comprehensive accounts payable (A/P)

Allows a firm to outsource all of part of its A/P and/or disbursement functions. There are two common approaches to managing this: ---> 1. A firm may send a data file to a financial service provider periodically, containing a list of all payments to be made. The file contains information on when to issue a disbursement and to whom, as well as instructions on the payment method to be used (e.g., check, wire, ACH, foreign draft, or foreign currency.) ---> 2. the financial service provider may maintain a database of a firm's payees that includes detailed information, such as preferred payment methods, specific remittance info, and the names of receiving financial institutions. The database is updated periodically as payees are added or deleted, or as an existing payee's remittance profile changes. Under this method, when a company needs a disbursement, it sends only limited payment information to the financial service provider. - With either approach, the financial service provider issues the payments immediately or warehouses the items.

Lease financing

Allows managers to venture into new product markets without purchasing the required capital assets. - If adequate revenues are not earned in the product market, then lease financing allows the firm to quickly exit the product line. - For many types of equipment acquisitions, leasing may be considered a substitute for debt (long-term lease) - Lessor is the individual or entity that owns the assets being leased. The lessor provides the asset and receives lease payments during the lease. - Lessee is the individual or entity that leases the asset. The lessee has access to the asset over the length of the lease and provides lease payments to the lessor. - For high uncertainty for future demand - For items outside firm's area of expertise

Group Captive

Also known as an association captive, resembles a single-parent captive except that it provides risk financing for multiple owners instead of just one. - The captive may be owned jointly be each of the individual parents or by an association that the parent companies have formed. - This shared ownership makes the group captive arrangement a form of insurance by virtue of the transfer of risk. In most cases, group captives are industry-based, which allows risk transfer across similar risks.

additional paid-in capital (APIC)

An account that reflects the difference at the time of issue between the par value and the issuance price (less underwriting costs) of newly issued stock. - for example, if new stock issued with a par value of $1 and the firm nets $25 per share, then a $1 per-share increase would be shown in the par value account and a $24 per-share increase would be shown in the APIC account.

Lines of Credit

An agreement in which the lender gives the borrower access to funds up to a maximum amount over a specific period of time. - Usually are revolving, meaning the borrower may borrow, repay, and borrow funds again up to the established limit during the commitment period. - can provide short-term financing, back up a commercial paper program, or provide temporary liquidity. - requirements and conditions frequently associated with lines of credit include cleanup periods, credit sub-limits, covenants, and material adverse change (MAC) clauses. ---> to ensure that a line is used for temporary financing, a lender may require a period of 30 to 60 consecutive days with no outstanding borrowing on the line (i.e., a cleanup period).

Bank overlay structure

An approach that combines both sweeping and pooling. - typically used when a firm's primary bank has branches in several countries, but the branches do not provide a full range of domestic banking services. - a local bank is used to provide collection and disbursement transactions and accounts, and to sweep surplus funds to the primary bank. - the primary bank (overlay bank) then notionally pools or physically transfers cash balances in overlay accounts, providing a multi-country solution. - exact structure of this arrangement will depend on the bank agreement and possible tax considerations.

disadvantages of short-term financing/borrowing:

An operational disadvantage of short-term financing, especially sources such as lines of credit or commercial paper, is the continuing need to renegotiate or roll over the financing. - this rollover risk is a disadvantage as a lender may decide not to roll over the loan or renew the credit line at maturity due to changes in the borrower's financial conditions or changes in general economic conditions. - in addition, lenders that provide 4line4s of credit typically require that loans used to finance short-term working capital deficits be paid in full for a minimum period of one to three months each year. - the downsides to this form of secured borrowing include: ---> the assets used as security must be monitored. ---> key ratios related to the assets must often be maintained. ---> lending is generally limited to some percentage of the asset values.

Step 5 of Risk Management Process: Monitor the Exposures and Evaluate the Strategy

An organization should monitor each material risk exposure. - The monitoring frequency depends on the likelihood of the risk, the materiality of the risk, and the organization's appetite for risk. - The effectiveness of each strategy must be periodically reevaluated as well. Such evaluations should be performed with the overall risk tolerance level in mind.

Prorated Backup L/C Fee (CP) =

Annual Fee Rate x CP Issue Size x (Days to Maturity/360)

Prorated Dealer Fee (CP) =

Annual Fee Rate x CP Issue Size x (Days to Maturity/360)

Single-parent captive

Another approach to risk retention is the use of a captive insurance company. - A single-parent captive is a subsidiary owned for the purpose of insuring the risk of a parent company or its affiliates. - The captive provides guaranteed access to insurance, may be used to provide unique types of insurance coverage or favorable rates, and often generates tax advantages for the parent company. - It should be noted that a major loss could result in insolvency for the captive, but the parent company would survive.

Repurchase agreements (REPO)

Another source of short-term funds. - with this, securities are sold, providing the seller with cash until the securities are repurchased. - they let firms tap into the liquidity of their investment portfolio without having to permanently dispose of their short-term investments.

Short-term interest rates

Are lower than long-term rates, which implies that there is a cost advantage to using short-term credit. - when short-term rates are higher than long-term rates, the yield curve is inverted and slopes downward with maturity. - a significant responsibility for treasury professionals is to monitor interest rate cycles and the yield curve, in order to make effective decisions about short-versus long-term financing. - borrowing on a short-term basis carries two risks to the borrower that are avoided in longer-term borrowing: ---> the first risk relates to fluctuations in market interest rates. ---> the second risk of short-term financing concerns the availability of funds. - long-term borrowing on a fixed-rate basis stabilizes interest costs and provides funds for a longer term.

Banker's Acceptance

Arises from commercial trade. - represents a time draft that is issued by a purchaser of goods to pay a supplier and that has been accepted by the bank on which the draft is drawn. - constitutes the bank's unconditional promise to pay the draft at maturity. - the holder (i.e., beneficiary) of the BA can either wait until maturity to receive payment in full or sell the BA prior to maturity at a discount.

Trade Credit

Arises when a customer receives goods or services but payment is not made to the supplier until a later date. - the primary source of short-term financing used by many firms, since it lets a buyer use the supplier's goods or services while simultaneously using the cash it otherwise would have had to pay in advance or upon delivery. - provides a tangible economic benefit as a source of financing because the buyer may avoid liquidating investments or incurring debt over the credit period.

Technology Risk

As the treasury area of an organization increasingly relies on technology, the operational risk associated with the use of technology increases. - Security breaches related to technology can either be internal or external types of risks. - Another type of technology risk is the risk associated with the choice of a particular technology platform or vendor, including issues such as the need for after-sale installation and support or even the risk that a vendor may go out of business. - May also involve extensive use of computer based spreadsheets in many parts of an organization's day-to-day operations.

FDIC fees

As with the reserve requirement, banks sometimes charge customers fees to cover the cost of federally mandated deposit insurance. - while the FDIC does not object to these fees, in 2012 the FDIC ordered banks to stop labeling these fees as FDIC fees, as this could mislead customers into thinking the fees go to the government instead of to the banks.

Asset-based borrowing

Asset-based lines of credit in the working capital area are typically secured by accounts receivable or inventory, and can support temporary financing needs. - commercial finance companies and some commercial banks specialize in this.

Credit Rating Agencies (CRAs)

Assign credit ratings for issuers of short- and long-term debt obligations, as well as for the debt instruments themselves. - it is important to remember that a credit rating is not an investment recommendation; rather, it is an assessment of the potential for downside loss on the investment. - generally have access to a borrower's internal information, and the CRA's analyses and subsequent rating are widely accepted by market participants and regulators. - part of the US Dodd-Frank Wall Street Reform and Consumer Protection Act addresses CRAs and the potential for conflicts of interest arising because the CRAs receive their primary revenues from the entities they rate and not from the investors who use the information. ---> Dodd-Frank requires the CRAs to provide greater disclosure of their rating models and methodologies, and subjects them to greater liability.

Required Borrowings (L/C) =

Available Amount / (1 - Compensating Balance %)

Interest Paid (L/C) =

Average Borrowings x All-In Rate

Annual Cost of Float =

Average Daily Float x Opportunity Cost

ZBAs (zero balance accounts)

Bank accounts in which the end-of-day balance is maintained at zero. - credits and debits that post to the ZBA are netted at the close of each business day. - from the account holder's perspective, if there is a credit balance in the ZBA, then the ZBA will be debited and the master account will be credited. This brings the balance in the ZBA back to zero. - if there is a debit balance in the ZBA, then the ZBA will be credited and the master account will be debited. - funding of the ZBA is generally done automatically by the bank and the appropriate accounting entry is made by the bank and the company to reflect the transfer of funds. - typically disbursement accounts on which a company issues checks, initiates ACH debits, or initiates wire transfers. - can be used for both collections and disbursements. - multi-tiered ZBAs may be used by firms with multiple divisions or subsidiaries to initiate payments from separate accounts or segregate different types of payments (e.g., A/P Payroll, dividends, and taxes). ---> a treasury professional can control the balances and funding of a master account and that account's associated ZBA's as if they were all one account. ---> This approach reduces excess balances and the need for multiple, manual transfers, while maintaining distinct information and audit trails.

Commercial Bank Credit

Bank borrowings represent an important source of working capital fro most firms, especially middle-market and smaller firms. - Larger, publicly traded firms often find bank credit attractive because banks can customize debt structures and use information not disclosed to the public to justify underwriting the debt. - Bank loans are offered on a secured or unsecured basis. ---> Security, provided in the form of collateral or guarantees, may be used to obtain more favorable rates by some borrowers or to make credit available to businesses that cannot access unsecured credit facilities. ---> a lender's use of private information may reduce borrowing costs. - forms of bank credit include: loan syndications and participations, and lines of credit.

Bank obligations

Banks raise funds in the money markets through time deposits, banker's acceptances, and repurchase agreements. - examples of time deposits include savings accounts, certificates of deposits (CDs), and negotiable CDs. ---> negotiable CDs are large-value time deposits issued by banks and other financial institutions that are bought and sold on the open market. They are usually traded in multiples of 100,000 or more. There is an active secondary market for negotiable CDs. - investments in CDs are protected by deposit insurance in the US. - Non-US banks and foreign branches of US banks raise funds in global money markets through Eurodollar deposits. - yankee CDs

TARGET2

Based on a common operating platform developed and operated by Banca d'Italia, Banque de France, and Deutsche Bundesbank on behalf of the Eurosystem. - the Eurosystem is comprised of the European Central bank and the central banks of countries using the euro. - It is the monetary authority for the euro area. - became operational in November 2007 and is Europe's RTGS system.

outsourced A/P services

Because of the complexity of many payment types and the need for extensive controls over disbursement activities, outsourcing disbursements is quite common. - Products used to outsource disbursements include: ---> freight payments ---> payroll services ---> integrated or comprehensive accounts payable (A/P) ---> payment factories

Cyberrisk (powerpoint)

Breaches of employee, customer,and corporate data. - Primary cyberrisk: Current and former employees - Financial criminals: customer credit card information. 1. Phishing e-mails gain access to employee e-mail. 2. Who requests and initiates wires? 3. Fake CEO wire request.

determine the business requirements (RFP)

Business requirements spell out what the firm hopes to accomplish, including the needs of the various stakeholders. - sometimes prioritized as must have, nice to have, and neutral. - end result

Business and financial risk

Business risk is related to the stability and predictability of the overall revenue stream. - the greater the revenue volatility, the greater the business risk. - financial risk is related to variability in net income ---> firms with lower levels of business risk or financial risk are able to carry higher levels of debt. - both can be measured with the degree of operating leverage and the degree of financial leverage.

cost of common equity

CAPM can estimate the market's required rate of return on equity. - funds from common equity can be raised via retained earnings or by issued new common stock.

Earnings Credit (EC) =

CB x (1 - RR) x ECR x (D/365) - RR = reserve requirement - ECR = earnings credit rate - D = number of days in the month - CB = average collected balances

Target Capital Structure

CFOs and treasurers factor in: ---> Operating risks and earnings volatility ---> Immediate and long-term financing needs ---> Relative costs of debt/equity ---> Risk tolerance ---> Credit rating impact

Banker's Acceptance (BA)

Can be used to finance the import, export, or domestic shipment of goods, as well as the storage of properly titled goods. - created when one person signs an unconditional written order directing a bank to pay a certain sum of money on demand or at a definite time to another person, usually to finance the shipment or temporary storage of goods. ---> the unconditional written order, also known as a time draft, is stamped as accepted by the bank. - by accepting the draft, the bank agrees to pay the face value of the obligation if the buyer fails to make payment. - may be held by the bank until maturity or be sold at a discount in secondary markets as short-term negotiable instruments, where the bank's credit standing is substituted for the creditworthiness of the issuer. - the cost of financing BA has two components: the discount rate (rate earned by the investor) and the commission.

Which is characteristic of a sinking fund debt repayment plan?

Can make payments into a trust each year to retire the issue at maturity

Hybrid (wholetail) lockboxes

Combine features of both wholesale and retail lockboxes. - would handle smaller volumes but machine-readable remittance documents.

Regulatory Restrictions and Minimum Capital Requirements

Countries often have regulatory restrictions that must be met to do business within that country. - a major concern in this area is so-called thinly capitalized subsidiaries of multinational companies. - a thin cap company has more debt and therefore makes higher interest payments than would normally be possible if it were a stand-alone company.

Actively Managed Portfolio Strategy (total-return strategy)

Contrasted with the buy-and-hold strategy in that an active approach pursues enhanced returns by capturing capital gains that may arise on relatively longer-dated instruments. - typically used by investors to meet specific needs or to earn higher returns. - one advantage is that for as long as the yield curve is positively sloped, capital gains are possible. - the threats to cash assets from this strategy arise when time passes but prices do not rise-- capital gains therefore do not materialize, and the investor's portfolio has a longer duration than intended due to the lack of capital gains. - investing in an actively managed portfolio, or using a total-return approach, is only appropriate for amounts of cash that are likely to be required no earlier than the longest-maturity security that might be purchased with such a strategy.

tax-based strategy

Corporate investors in high tax brackets may favor tax-based strategies that are designed to minimize income taxes on investment return. - For global organizations, there may be advantages related to developing a globally based investment strategy. There are often tax advantages related to investing in one location or currency versus another, and an organization operating in many different currencies and countries must often maintain liquidity in many currencies and locations. - Dividend capture is another tax-motivated, short-term investment strategy also available to corporations that pay taxes in the U.S. A firm may exclude from its taxable income 70-80% of the dividends received from stock owned in another corporation, as long as it owns the stock for at least 46 days of the 91-day period starting 45 days prior to the ex-dividend date. ---> Even though dividend capture requires an equity investment, the strategy is considered a short-term investment because the stock is held only long enough to capture the dividend and qualify for the dividend exclusion.

monitoring requirements

Creditors monitor borrowing firms to ensure that they adhere to the covenant and reporting requirements specified in the indenture or loan agreement. - These monitoring requirements entail a cost borne by the firm.

Managerial flexibility

Equity financing does not obligate the firm to make fixed payments to investors; dividend payments are option. - furthermore, stock does not mature.

r*rf (real risk-free rate of interest)

Defined as the rate demanded by lenders (i.e., investors or savers) to compensate for delaying purchases made today, in the absence of any risk or inflation, for a one-year maturity. - the real risk-free rate demanded by savers becomes the basis for the overall borrowing rate.

Common stock valuation

Differs from that of bonds and preferred stock because the timing and level of cash flows associated with common stock ownership are not fixed. - one of the primary advantages of investing in common equity is the growth potential in earnings and dividends. - both timing and cash flow amount may vary. - assumes dividends grow at a constant rate. - to value common stock, an investor must estimate the present value of the future dividend stream. - required rate of return determined using CAPM.

Direct Deposit via Automated Clearinghouse (ACH)

Direct deposit via ACH has been used widely in the U.S. since the early 1980s for both government and commercial payments, and now is routinely used throughout much of the world. - the introduction of the SEPA credit transfer scheme in the Eurozone and cross-border ACH in other countries has made global use of direct deposit simpler and more acceptable for many firms. - direct deposit via ACH can be used for payroll, employee expense reimbursements, interest payments, tax payments, dividend distributions, and B2B transactions. - two advantages of direct deposit via ACH are the low cost of the transactions and the certainty of timing.

Dollar Discount (CP) =

Discount Rate x Par Value x (Days to Maturity/360)

Diversification

Diversification across issuers can help reduce the overall risk of a fixed-income portfolio. - credit risk diversification reduces the overall risk of the portfolio as long as credit rating changes and defaults are not highly correlated.

Dollar-days of float =

Dollar Amount x Total Days of Float

Domestic concentration of funds

Domestic cash concentration systems typically transfer funds from outlying depository locations, often at different banks, to a central bank account at a firm's primary bank, commonly referred to as a concentration account. This process is referred to as sweeping. - Retailers accept cash, checks, and payment cards at the point of sale (POS). - The introduction of banking services such as RDC and smart safes has simplified the process by allowing many firms to eliminate most field bank accounts and deposit funds directly into their concentration account. - Most large retailers transmit information on local receipts from POS terminals to headquarters. - One alternative to an ACH payment is a wire transfer. However, because wire transfers are an expensive funds transfer mechanism, they are used primarily to concentrate large dollar amounts when same-day value and finality are critical. - Consequently, a break-even analysis is required to determine the appropriate funds transfer mechanism.

Dt+1 =

Dt (1 + g)

EVA =

EBIT(1 - T) - (WACC)(Long-Term Debt + Equity)

the cost of equity

Equity is often one of the most expensive sources of capital. - this is attributable to the greater level of risk for equity holders compared to debt holders, and the fact that there is no tax benefit associated with equity issuance.

general risk management

Effective risk management helps minimize the adverse effects of actual and potential losses by either preventing such losses from occurring (i.e., risk control) or financing the recovery from any losses that do occur (i.e., risk financing). - the purpose of an organization's risk management process is to: ---> help managers identify future events that create uncertainty ---> respond to negative possibilities by balancing the negative economic and/or regulatory effects of these possibilities with the costs that will be incurred to mitigate or eliminate them. ---> guide recovery actions when serious negative events occur.

Electronic Disbursement Products

Electronic funds transfers (EFT) via wire transfer and ACH are for B2C and B2B payments, as well as for payments from G2C, B2G, and C2C. - One popular way is ACH direct deposit feature. (cheap way to electronically transfer money) - One of the significant advantages of electronic disbursements is the ability to include remittance information with B2B payments. - more companies are moving away from check to ACH deposits. - types: ---> direct deposit via ACH ---> Tax payments ---> wire transfers ---> card payments

Small-value transfer systems

Electronic networks for the exchange of smaller payment instructions among FIs, typically on behalf of customers. - example: ACH in the U.S. - are payment instructions to either debit or credit a deposit account. - they are typically batch-processed, value-dated electronic funds transfers between originating and receiving FIs. - can transfer more payment-related information than can normally be transmitted via paper-based instruments or wire transfers. - these transactions can be payroll credits, pre-authorized debits, or debit filters and blocks - a giro payment, available in some countries, is the functional equivalent of an ACH credit. - terms originator and receiver are used. - the standard option for distributing cross-border payments between deposit accounts is known as an account-to-account transfer.

Economic Value Added (EVA)

Emphasizes that the firm must earn a rate of return on assets that exceeds the WACC in order to create value for shareholders. - if a firm earns less than the WACC, then the firm value will fall because market return expectations were not met. - a positive EVA indicates that the firm over-performed in the previous year, and the firm's share price should increase.

Which is a more significant source of employee risk than the others?

Employee data entry errors (transposition or deletion errors are very common)

sale-and-leaseback

Equipment is sold to another party (lessor) and then immediately leased back by the original owner (lessee). - aids firms that need cash or that cannot take full advantage of the tax benefits from depreciation due to excessive operating losses. - these arrangements can move the cash flow stream (income or costs) to different periods as well.

Payment factories

Essentially a centralized A/P processing center. - It is often part of a centralized treasury operation known as an in-house bank, or it may be set up as part of an organization's enterprise resource planning (ERP) system. - often used in multinational organizations with a large number of cross-border payments. - can also be linked to multilateral netting systems or re-invoicing programs in order to reduce the number of transaction between subsidiaries of a company, as well as better control overall exposures from foreign currencies. - to send payments outside the organization, a single payment file from all the operating units can be sent to a global or regional bank, which can then arrange for payments to be made in local currencies to the vendors.

Sensitivity Analysis

Examines the impact of a change in the value of a variable on a selected outcome measure, assuming all other variables are held constant. - The value of a single input is varied and the change in the financial model is observed. - Helps to identify the variables that have the greatest influence on a financial model (e.g., NPV). Once identified, these variables can be categorized as uncontrollable or somewhat controllable. ---> A monitoring protocol should be established to alert the user to unfavorable movements in the uncontrollable variables so that operations can be adjusted as needed.

signature cards and service agreements

FSPs require firms to furnish signatures of authorized signers (or specimens of both facsimile and computerized signatures) for all accounts. - in conjunction with any signature card, providers typically provide a standardized set of service agreements to companies when relationships are established and accounts are opened. - service agreements are contracts -- legal documents that describe the requirements and expectations of both the purchaser and provider of a specific service or services.

FSP

Financial service provider

DP

For investments other than government securities, there is a risk of default on the part of the borrower that must be factored into the rate of interest, know as the default risk premium. - as the level of default risk rises, so does the required interest rate.

Base Rates

For most borrowers, the cost of funds is expressed as the sum of a base rate plus an appropriate adjustment or spread to account for other risks involved in the arrangement. - The base rate will generally include the adjustments for inflation and maturity premiums, while the spread will factor in adjustments for the default and liquidity premiums. - Economic conditions and yield curves influence the general level of interest rates and base interest rates for borrowing, such as LIBOR and, to a lesser extent, the Fed funds rate and the US prime rate. - LIBOR is quoted in numerous currencies and is released to the market in London each day. (fluctuates on a daily basis) - The Fed Funds rate is the interest rate US banks charge to borrow reserve balances from one another. - The prime rate is the interest rate commercial banks charge their best corporate customers, although strong, creditworthy borrowers usually can obtain rates below prime from their financial partners. (typically set about 3 percentage points above the fed funds rate and can remain fixed for extended periods of time).

Loan Syndications and Participants

For organizations requiring large credit facilities, banks may extend those facilities through these. - In a loan syndication, multiple financial institutions share the funding of a single credit facility. The syndicate, or group of lenders, is led by an agent who acts as the intermediary between the firm and the syndicate to negotiate credit terms and documentation, make advances and collect payments on the loan, and disseminate information. ---> all syndicate members share common documentation, but each lender has a promissory note, making it a direct lending relationship. - In a loan participation, a financial institution purchases an interest in another lender's credit facility. The purchaser is called a participant, and the seller is the lead institution. ---> the participant does not have a separate note and has only an indirect relationship with the borrower. ---> a participation agreement specifies the participant's and lead institution's rights and obligations. ---> in the case of a blind participation, the participation is not disclosed to the borrower, and the participant may not contact the borrower directly or disclose the participant's role in the credit facility. - these arrangements both allows banks to offer larger loans than they could on their own due to capital requirements, and to expand their loan portfolio beyond their usual market, creating a more diversified mix of loans.

Short-term investment policies

Formulating a short-term investment policy requires (1) recognition of the primary short-term investment objective of preservation of principal and (2) determination of the firm's overall risk tolerance by the firm's board and management. - Additionally, a board-approved investment policy should include the following: ---> investment objectives with respect to risk and return. ---> permissible and prohibited investment vehicles or classes of investments ---> minimum acceptable security ratings ---> maximum maturity for individual securities ---> maximum weighted average maturity or duration for the portfolio ---> maximum amounts of concentration limits of the portfolio that may be invested in individual securities, companies, instrument classes, geographic areas, or industries ---> policies/guidelines for investing in foreign securities ---> specific responsibilities for implementing the policy, by organizational title ---> methods of monitoring compliance with policies, procedures, and internal controls ---> provisions for performance measurement, evaluation, and reporting ---> responsibilities and reporting requirements for custodians, external investment managers, broker-dealers, and other investment counterparties ---> exception management and related approval processes

Step 4 of Risk Management Process: Develop and Implement an Appropriate Risk Management Strategy

Four essential risk management approaches: - Avoid the Risk: This approach may involve a company deciding not to enter into a certain line of business or utilize a particular business or manufacturing process due to the risks involved. (choosing a particular process) - Mitigate the Risk: Mitigating risk generally involves putting appropriate controls in place to limit the potential risk exposure. In financial risk management, approaches such as using derivatives or balance sheet hedges create a financial position that offsets the risk from an ongoing business process. Other risk mitigation approaches include process and facility design, project management, education, and compliance management. - Transfer the Risk: With this approach, the organization moves a given risk to another party. The primary means of transferring risk is through insurance. A company may also contractually transfer risk by requiring that the risk be borne by another party in the supply chain. - Retain the Risk: Some lines of business carry inherent risks, and it may not be possible to completely avoid, transfer, or mitigate all the risks in certain types of operations. In these cases, it may be optimal to selectively bear some risks. Since the risk of loss is retained and not transferred to another party, the firm must have the financial resources available to cover those losses.

US Federal Agency and GSE Securities (Government-Sponsored Enterprise)

GSEs are private companies that act as financial intermediaries to provide funds for loans made in the housing, education, and agriculture sectors. - key GSEs include: ---> FNMA or Fannie Mae ---> FHLMC, or Freddie Mac ---> Department of Veterans Affairs (VA) ---> GNMA, or Ginnie Mae ---> Federal Farm Credit Banks Funding Corporation - although GSEs do not generally have the credit backing of the US government, the importance of GSEs to public welfare has motivated the federal government to intervene in past crises.

In-House (internal) management

Generally appropriate only to the extent that the individuals charged with this responsibility have the training and experience required to effectively manage the portfolio. - a further requirement is that appropriate controls are in place to approve and monitor investment activity. - the primary advantage of in-house management is that the firm maintains control over the investment process. - however, a key disadvantage of in-house management is that it is costly to hire, train, and retain employees with the skills needed to execute the short-term investment strategy. Some firms deal with this issue by investing only in MMFs. - This practice may help alleviate some of the need for market knowledge and research, but does not relieve the firm of its overall responsibility to effectively manage its portfolio.

ABCP (Asset-backed commercial paper)

Has most of the features of standard CP, but it is secured against specific assets -- usually short-term trade receivables from a single company or a range of companies. - issued through a sponsoring financial institution, referred to as a conduit - it may be classified as either single seller, if it is backed by assets from a single institution, or multi-seller, if it is backed by assets purchased from a number of issuers. - primary advantage is that it offers more security than standard CP. ---> In addition, credit enhancement from the sponsoring bank will facilitate timely repayment at maturity. - in terms of disadvantages the complex structure of the ABCP makes it harder to appraise the overall risk of the security and may therefore require the use of third-party credit monitoring. Another disadvantage is that the ABCP market is smaller than the standard CP market. These disadvantages increases the liquidity risk. - However, investors tend to be rewarded for this extra complexity with a moderately higher rate of return than on standard CP.

Card payments

Have become an important disbursement method for consumers and for businesses. - if payment cards are used by the firm's employees, it is important to establish and document policies and procedures to provide appropriate controls. - cards used for disbursement purposes include purchasing cards, travel and entertainment (T&E) cards, virtual cards, and single-use cards.

Improved ability to spin off divisions

IPOs can also be used to spin off a division or wholly owned subsidiary of a firm that is already public. - this process is often used by large, diversified firms when it is determined that a particular part of the firm might be more valuable as a stand-alone entity.

profitability

If operations are profitable, then additional funds are available as an internally generated financing source. - all else constant, profitable firms will have increased access to debt financing. - profitability helps ensure creditors that the firm has sufficient earnings capacity to service the debt.

Municipal Notes, Variable-Rate Demand Obligations (VRDOs), and Tax Exempt Commercial Paper (CP)

In addition to paper issued by the federal, state, and local governments, their agencies, authorities, and subdivisions raise funds in the money market through Municipal Notes, Variable-Rate Demand Obligations (VRDOs), and Tax Exempt Commercial Paper (CP). - Many municipal and not-for-profit entity issues are expempt from federal income taxes and/or state income taxes in the state of issuance, making these attractive for investors seeking tax-free income. - Most of these short-term municipal issues are used by local governments to provide interim financing for general obligation bond projects or short-term working capital in anticipation of future tax revenues. - VRDOs are issued as long-term bonds that carry a short-term liquidity feature, or put.

Reserve Requirement

In the context of earnings credit computation, the reserve requirement represents the amount that the bank must maintain with the Federal Reserve. - historically, reserve balances that were needed in order to satisfy the reserve requirement were non earning, hence the practice of deducting this reserve from balances that received an earnings credit. - just as commercial banks are now allowed to pay interest on commercial accounts, US reserve baks can now pay interest on reserve balances. - many banks, however, still deduct the reserve from available balances in calculating earnings credits. - as with most things related to analysis statements, the amount of funds deducted for reserve requirements is usually negotiable.

drafting the policy

In this stage, the development team creates the new basic policy or modifies an existing policy, using a common format and set of definitions. The policy should represent a consistent, logical framework for organizational action. - general guidelines for the creation of the policy include: ---> use clear, concise, simple language ---> address what the rule will be, rather than how to implement it. ---> make the policy readily available to the organizational area. ---> describe clear lines of authority. ---> designate expert resources to interpret the policy if questions arise. ---> identify the parties who will review and approve the policy, and define any ongoing review process.

Earnings Dillution

Increasing the outstanding number of common shares will automatically reduce earnings per share in the short run, assuming that earnings remain constant. ---> This is referred to as dilution. - Dilution can lead to a reduction in stock price if investors believe that management will not be able to use the new capital to increase earnings enough to maintain or increase the expected earnings per share.

TMS (Treasury management systems)

Initially developed in response to the need to use one system to access multiple banks. - today, most TMSs not only provide access to multiple banks, but they also typically provide expanded functionality in terms of managing debt, investments, foreign exchange, letters of credit, bank communications, and risk. - often include the capability to directly connect with internal accounting and other financial systems. - the expanded functionality comes at a higher cost, and often requires some form of internal information technology support to operate or configure the solution.

Tax benefits of debt

Interest payments paid by corporations are generally tax deductive. - subsequently, a firm's after-tax cost of debt is considered to be more relevant than the firm's before-tax cost of debt. - the tax deductibility of interest expense is often referred to as a tax shield.

Which reduces the risk of dramatic rate swings when borrowing at prevailing interest rates?

Interest rate caps, collars, swaps, floors

repatriation of capital for multinational corporations (MNCs)

Involves the transfer of funds between countries. - Most repatriation policies are related to the transfer of funds back to the parent from wholly or partially owned global subsidiaries. - the principal method of repatriation is the use of dividends. - the use of dividends to transfer profits from global subsidiaries is often restricted by host governments. - MNCs unbundle the cash flows from subsidiaries into separate items that are justified more easily to foreign governments than outright dividends. The techniques for separating items are: ---> management fees ---> transfer pricing ---> intercompany loans

Remote Deposit Capture (RDC)

Involves using a check scanner to capture an image of a check payment, which is then used to facilitate deposit at the depository bank by image deposit. - this service eliminates the need to gather the checks and take them to the bank or send them via mail or overnight courier. (eliminates check transit) ---> this speeds up collection time, reduces the risk that the checks will be lost or stolen in transit, and typically reduces the overall cost of check processing. - As with smart safe, RDC allows a depository bank to service locations that are physically distant from a bank facility, alleviating the need for subsequent cash consolidation from a local field bank. - In some cases, RDC scanners are being incorporated into the electronic safes used for smart safe services, providing a consolidated service for retail organizations. - this product is limited to checks denominated in US dollars.

Commercial L/C

Issued by a bank as the intended mechanism of payment in relation to a trade transaction involving the domestic or international shipment of merchandise. - typically requires presentment of a draft, commercial invoice, and related shipping documents. - banks may serve a variety of roles in L/C transactions: ---> issuing bank: the importer's bank that issues the L/C in favor of the exporter. ---> advising bank: advises the exporter of an L/C in its favor. ---> confirming bank: other banks that may be involved in the transaction. (also called the negotiating bank) - the advising and confirming bank are frequently the same bank, performing dual roles. The two examine the documents presented by the beneficiary (i.e., the exporter), receives payment from the issuing bank, and pays the beneficiary. - Requires the presentment of a draft, invoice, or shipping documents - Referred to as a documental L/C - Ensures cross border transactions and sales

Predevelopment stage (writing the policy)

It is essential to get authorization and support for the entire policy development process at the highest level possible in the organization before development begins. - A vital step is to appoint an individual or group to take the lead and to whom primary responsibility for the development process can be assigned. - Targeted individuals to fill this role typically include the general managers of the functional areas directly impacted by the policy. - Staff from the various functional areas directly affected by the policy should also be included in the policy development process.

Availability of remittance information

It is important to know who made the payment and why, especially if the payment is for less than anticipated. - in addition to receiving money, you want to make sure it is properly recorded in the company.

Loan Agreements and Covenants

Loan covenants impose either restrictions, known as restrictive or negative covenants, and/or obligations, known as affirmative or positive covenants, on the borrower. - loan covenants generally protect the lenders by preventing management from increasing the borrowing entity's credit risk, thereby reducing the value of existing debt securities. - the covenants may impose specific restrictions on the entity's financial decision making: ---> Key ratios that limit financial decision making flexibility ---> Ability to sell certain assets ---> Right to issue more bonds ---> Use of second or junior mortgages ---> Dividend payment

Net Benefit of Lockbox =

Lockbox Float Savings - Annual Cost of Lockbox

Internal processing has $99k annual float, 9% opportunity cost, and $3k in variable internal processing. A lockbox has $24m dollar-days in 30 days, $10k in fixed costs, and $6k in variable costs. Which method has the net benefit?

Lockbox: $14k - $24m/30 = $800k - $800k x 0.09 = $72k - $99k - $72k = $27k - $27k - $10k - 6k + $3k = $14k lockbox

MP (maturity premium)

Longer-term fixed instrument investments generally have more price risk (i.e., they fluctuate more in price for a given change in interest rates). - As a result of this price risk, longer-term securities usually have a maturity premium in addition to the other interest rate adjustments.

Market conditions

Management should consider current and expected conditions in the macroeconomic environment when choosing the appropriate capital structure. - investing bankers can be a good source of expertise in assessing current and projected market condition.

management fees

Many MMCs charge global subsidiaries licensing and/or management fees in order to justify to host governments the flow of funds from a subsidiary to the parent company. - often, these fees are negotiated with the host government prior to when the MNC invests in the country.

debt and investment transactions

Many TMSs provide the ability to manage debt and related derivative transactions. - This includes portfolio of short- and long-term borrowings at fixed and floating rates, letters of credit, and lease contracts, as well as specialized functions such as calls, puts, and custom amortization schedules. - most TMS providers include a limited range of debt transactions within their base module. - users can manage portfolios of short- and long-term investments, including money market funds and municipal bonds, as well as interest-bearing, fixed-rate, floating-rate, and amortizing contracts. - as with debt, a limited amount of investment functionality is incorporated in the base TMS package, with additional functionality available as needed.

Tax payments

Many taxing authorities throughout the world allow electronic payment of various types of taxes. - In the U.S, the Electronic Federal Tax Payment System (EFTPS) is the primary method for collecting and accounting for federal taxes withheld by employers from individuals' salaries and wages, as well as corporate business, sales, and excise taxes. - Sub-sovereign or local taxing authorities are also moving toward electronic payment of taxes. ---> In the U.S., most states require companies with tax payments above certain amounts to remit them electronically. - The standard NACHA payment format for state and federal tax payments via ACH is known as the tax payment (TXP) banking convention, yet usage and specific formats vary from state to state.

SLA (service level agreement)

May be a separate document or part of the service agreement. - primarily concerned with the definition of the specific services provided and the operating metrics used to measure the level of service provided. - typically include a description of any penalties for failure to comply with the requirements of the agreement.

Inter company loans

May provide a low-cost source of funds. - multiple units of a firm-- typically, separate subsidiaries of a multinational firm that are often in different countries -- may borrow and lend among themselves through an in-house bank or other internal borrowing mechanism,. - termed inter company lending, these arrangements are formal and usually involve promissory notes or a memorandum of understanding. - they are normally prices at market rates, or "arm's length" rates, to comply with tax and regulatory requirements; however, the entity as a whole retains the money.

Cost of collection

Minimizing the cost of any collection system is important, but the cost must be balanced against the prior items. - cost needs to be weighed against improving speed, security, or remittance info availability.

Final Approval

Most treasury policies will need to be formally approved by the board of directors or equivalent, since they typically involve delegation of board authority and prerogatives. - policies with a lower impact may only require approval at a designated executive level. - final approval authority will vary depending upon existing delegations of board authority.

B2B (Business-to-business)

Payments move funds fro one business to another, typically for vendor payments. - While this payment category represents the smallest portion of payment volume, it typically represents the largest segment of payment value, - increasingly, these payments are made with electronic payments or via cards.

SWIFT (Society for Worldwide Interbank Financial Telecommunication)

Not a payment system, it is a communication system used by most of the banks in the world to transmit payment instructions, among other things. - it is an industry-owned, cooperative, interbank telecommunication network that enables banks to send authenticated electronic messages in standard formats. - transfers use correspondent banks - SWIFT communications contain payment-related information, but do not actually transfer value. - for corporate customers SWIFT provides a limited membership that allows a corporation to utilize SWIFT's multi bank platform to exchange financial information with its banks through one standardized platform. ---> this may allow the corporation to reduce or eliminate transaction costs while increasing the speed of payment and minimizing the necessity of maintaining multiple bank connections in order to send/receive information and initiative payments.

leveraged buyout (LBO)

Occurs when an acquisition is financed primarily by using the acquired firm's assets as collateral. - the debt is normally carried on the balance sheet of the acquired firm, and the debt is serviced by the acquired firm's operating cash flows. - an LBO often involves more risk than an acquisition paid for through the issuance of equity securities, due to the high level of debt and the need to generate ongoing cash flows to make the debt payments. - many LBO investor groups hope to capture value by selling off the acquired firm's assets in pieces. - LBOs differ from ordinary acquisitions in two major ways: ---> first, a large fraction of the purchase rice is debt-financed. Typically, a large portion of the debt is junk (below investment grade). ---> second, the LBO goes private, and its shares no longer trade on the open market. The LBO's stock is typically held by a partnership of investors. When this group is led by the company's management, the acquisition is called a management buyout (MBO).

Fraudulent endorsement

Occurs when an authorized check is stolen or intercepted by a third party, and then that party endorses and cashes the check. - positive pay services cannot protect against this type of fraud. ---> so long as the check amount, the check number, and potentially the payee are not altered, this type of fraud is not usually detected by positive pay. - checks returned for forged or fraudulent endorsement are not subject to the normal next-day return deadline and may be returned upon discovery of the forged endorsement, subject to any agreed-upon limits with the paying bank. - Positive pay, ACH filters and blocks, and daily reconciliations are among the methods most used to help detect and control payments fraud.

approval of the policy

Once a policy has been developed, it should be revised as part of a four-level formal approval process: - 1. Treasury Department Review - 2. Review by Other Functional Area Managers - 3. Review by Internal Audit and/or Compliance Group - 4. Final Approval

B2G (Business-to-government)

Payments include taxes fines, and other government fees.

diversification for owners (IPO advantage)

Owners of closely held firms may have a large proportion of their wealth invested in the firm. - By selling a portion of stock to the general public, owners may invest the proceeds in other areas and increase their personal diversification, as well as raise capital.

G2C (Government-to-consumer)

Payments include various government-issued payments such as retirement, social security, and welfare payments. - the majority of these payments are electronic or card-based.

liquidating dividends

Paid out of capital rather than earnings. - sometimes occurs when a firm or one of its divisions is going out of business and management decides to pay off shareholders through a liquidating dividend. - the remaining assets of the failed firm or division are liquidated to pay the dividend.

Usable Funds (CP) =

Par Value - Dollar Discount

Dollar Discount =

Par Value - Purchase Price

RDC (Remote Deposit Capture)

Payee deposits a check to the payee's bank (depository, collecting bank), or the bank of first deposit, as a check image using this process. - A service that allows a payee to scan a check received as payment and transmit the scanned images to a bank for posting and clearing, instead of having to deposit physical checks. -often now available for consumer and small-business depositors.

RTGS Systems (Real-Time Gross Settlement)

Payment systems that offer immediate and irrevocable value. - a common example is a wire transfer system.

G2B (Government-to-business)

Payments are usually for vendor payments.

C2G (Consumer-to-government)

Payments include taxes and other government fees.

C2B (Consumer-to-business)

Payments move funds from consumers to businesses, typically for purchases and bill payments. - historically, these were largely cash and check payments in the US, or cash and giro payments in Europe. - now, small-dollar transactions at the point of sale are still often cash, but the majority of the other payments are either card payments at the point of sale or electronic payments made through a bank.

C2C (Consumer-to-consumer), or P2P (Person-to-person)

Payments move funds from one individual to another. - examples include income payments (exp: babysitting or lawn moving) and various personal payments (exp: gifts).

Single sign-on (SSO)

Permits an individual to enter one name and password in order to access multiple applications on the same network or at the same host. - has broad applicability to all technology and can simplify access for treasury professionals that access multiple systems. - for example, SSO is helpful when accessing a bank website or a hosted TMS provider with multiple applications, such as report generation and transaction initiation, because it allows an individual to sign on and authenticate one time and not have to be authenticated with each individual application.

Annual Preferred Stock Dividend =

Preferred Stock Dividend Rate x Par Value

Pricing for a line of creditL

Pricing for a line of credit is usually negotiable. There are three basic cost components for lines of credits: - 1. The all-in rate of interest ---> Consists of a base rate, such as LIBOR, the US prime rate, or the Fed funds rate, plus a spread that is added to, or occasionally subtracted from, the base rate. - 2. Commitment fees, which can be on both used and unused balances - 3. Compensating balances - The total interest paid is calculated as the all-in rate times the loan balance outstanding at any given time. - Annual (or period) interest is the total of the daily interest charges during the year (or period). - Total fees paid include all commitment fees, placement fees, and any issuance costs. - The average usable funds of the borrowed amount equal the average outstanding loan for the year less the required compensating balances.

identifying issues and conducting analyses

Prior to drafting the policy, the issues relating to the proposed policy should be identifies and analyzed. - If membership on the development team includes all of the affected areas, then the chances of creating a policy that will be accepted by those affected are very good. - The owners of all related processes should be included, and an agreed-upon flowchart, including workflows and organization charts, should be created for the proper execution of those processes.

retail lockboxes

Process payments that involve machine-readable remittance documents (i.e., "coupons"), such as utility and credit card payments. - these are typically C2B payments and tend to be high volume, which may justify the cost of the equipment used to process and read the remittance documents.

develop the project plan (RFP)

Project plans identify the tasks that comprise the project and define completion dates, assigned resources, and task dependencies.

Selling of receivables

Receivables may be sold or discounted to raise cash in two ways. - First, receivables may be sold at a discount from face value to a third party called a factor. ---> The factor then collects on the receivables. This process is referred to as factoring. - Second, receivables can be securitized. ---> Through securitization, a firm issues debt securities backed by a pool of receivables. - Receivables that are suitable for debt securitization have a predictable cash flow stream adequate to retire the issue and a historical record of low losses.

Mergers and Acquisitions (M&As)

Refer to corporate consolidations involving either two or more firms combining together (in a merger) or one firm being purchased or acquired by another (in an acquisition). - motives for these include tapping into growth potential, reducing costs, and strengthening balance sheets (e.g., acquiring a firm with substantial cash holdings). - whether a purchase is considered a merger or an acquisition depends on whether the purchase is friendly or hostile, and how it is announced.

Enterprise Risk Management (ERM)

Refers to a comprehensive, organization-wide approach to identifying, measuring, and managing the various risks that threaten the achievement of the organization's objectives. - the topic of ERM is pertinent to treasury professionals since the treasury function is typically responsible for some of ERM's subcategories, such as financial risk management. - one purpose is to ascertain if and how each department contributes to, or is impacted by, a particular risk category. - the comprehensive approach allows the full scope of risk to be assessed across division lines.

Capital Structure

Refers to the mix of debt and equity used to fund the assets held by a firm. - new capital is required to finance a firm's growth strategies. - the firm's target capital structure refers to the mix of long-term debt and equity that produces the minimum weighted average cost of capital (WACC). - A lower WACC allows the firm to be more competitive when pursuing investment opportunities.

Encryption

Refers to the process of transforming information using a computer-based model to make it unreadable to anyone except those possessing the key. - encryption addresses several security needs. - encryption helps protect privacy. - properly designed encryption programs can also help with non-repudiation because the fact that a message has been encrypted and subsequently decrypted indicates that the originator possessed the specific key needed to originally encrypt the message. ---> this also implies at least single-factor authentication. - many popular encryption programs are designed using what is called public-key infrastructure (PKI). ---> PKI involves the use of dual keys. ---> one of the keys is private and is kept by an individual user or organization. ---> the other key is using the other key. - information encrypted with one key can only be decrypted and read using the other key.

Commercial paper (CP)

Refers to tradable promissory notes that represent an unsecured obligation or debt of the issuer (i.e., the CP is not backed or "secured" by any collateral of the issuer.) - maturity can range from overnight to 270 days for publicly traded CP, but most CP matures in less than 45 days. - the yield on CP is primarily influenced by the difference between the purchase price and the face value. - CP offers investors various advantages: the broad range of available maturities allows investors to choose CP issues with the desired maturity. Also, investment grade CP is highly liquid. ---> Investors can diversify the risk of their CP holdings by investing in CP across different industries and sectors of the economy. Both Europe and the US have highly developed CP markets, offering opportunities for geographic diversification. - a disadvantage of investing in CP is that it is not secured against a particular asset. Consequently, CP is commonly issued with credit enhancement.

Risk Management Policy and Governance

Regardless of an organization's approach to risk, it is important for the firm's risk management committee and chief risk officer to have a clearly defined risk management policy endorsed and approved by the highest management level possible, preferably the board of directors. The policy should: --> Contain a concise statement of the risk management goals and the overall scope of the risk management policy (e.g., avoid, mitigate, transfer, or eliminate risk) ---> Define authorities and responsibilities as well as the role of the chief risk officer. ---> Identify the types of exposures to be managed. ---> Delineate the mitigation techniques and products that may be used. ---> Outline the process for determining the specific strategies to be employed and exposures to be mitigated. ---> Summarize the process for monitoring performance of the strategies. ---> Outline contingency plans ---> Require periodic review of the policy and testing of plans.

Lender and Rating Agency Considerations

Regardless of what management or shareholders beleive is the target capital structure, lenders may require a more conservative level of debt to protect their interests. - rating agencies will also provide guidelines on capital ratios needed to qualify for particular ratings. ---> as a result, management has to bear in mind the impact on its credit rating when evaluating a change in the firm's capital structure.

Retained Earnings

Reinvesting earnings is a lower-cost source of equity than the issuance of new common stock. - By retaining earnings instead of paying dividends, the firm raises equity capital without the underwriting cost associated with issuing new stock.

Initial Public Offerings (IPOs)

Require significant disclosure of a firm's ownership, business activities, and financial statements. - publicly held firms are required by various regulators, such as the SEC, to file a wide variety of forms and reports on a regular basis. - one of the principal advantages is that access to capital markets offers the potential to raise large amounts of debt and equity at prevailing rates. - one of the disadvantages is the significant cost involved in managing the reporting, disclosure, and rating agency requirements for public security issues. - describes an issuer's first public offering of a security of any class.

CB =

SC / ( ECR x (D/365) x (1 - RR) ) - SC = monthly service charges - CB = average collected balances required to pay bank service charges

Cyber risk

Security breaches involving employee, customer, and corporate data represent cyberthreats. These cyber breaches may come from both internal and external sources. - Current and former employees represent the primary source of cyber risk for an organization, given the access that they have to information. Internal cyber attacks may be deliberate or the result of an employee error. - Other attacks may result from an employee opening phishing e-mails. Most business email compromise (BEC) scams begin with a phishing e-mail that is used to gain access to an employee e-mail account. After monitoring that employee s email account to determine who requests wire transfers and who initiates them, the fraudster will generate a fake e-mail from the CEO requesting the initiation of a wire transfer.

Treasury Department Review

Senior treasury staff should review and approve the policy, ensuring that it meets the intended purpose and objective, and that its content includes the required controls consequences associated with the policy and related procedures. - this review should include an assessment of reasonableness and functionality, as unreasonable policies are typically ignored.

Imprest Accounts

Sometimes used as a petty cash account. - is an account maintained at a fixed amount for a particular purpose or activity. - based on either an established time frame or a designated level of imprest account balances, the field office submits expenses to headquarters for approval, and headquarters replenishes the imprest account and brings it back to the fixed amount.

Tax Equivalent Yield =

Tax-Exempt Yield / (1 - Marginal Tax Rate)

After-Tax Yield =

Taxable Yield x (1 - Marginal Tax Rate)

Integrity

The ability to ensure that a message was not modified in transit and that stores information has not been improperly modified or deleted (Data integrity is especially important for financial transactions).

Authorization

The ability to know and control what functions and data an authenticated individual can access and use.

Authentication

The ability to know, with a reasonable amount of certainty, who is accessing information or initiating a transaction.

Asset structure

The ability to use assets as collateral for loans can allow management to choose higher levels of indebtedness. - assets that provide favorable collateral include liquid assets with reasonably certain market values.

Estimated Residual value

The amount remaining of a depreciable asset after all allowable depreciation charges have been subtracted from the asset's book value. - in most cases, this value is built into the leasing arrangement. - assets with potentially high residual values generally have lower lease payments than assets with lower residual values.

Available or Investable Balance

The available balance, sometimes referred to as the investable balance, represents the balance in the customer's account that the bank was able to invest in income-producing assets during the account analysis period. - Some banks calculate the investable balance as the average collected balance minus the reserve requirement balance. - the investable balance can be a surplus or deficit.

Efficiency of debt markets

The capital markets for long-term debt are generally efficient, especially for debt issues that are highly rated. - In normal markets, there is typically an adequate supply of investor funds to purchase large debt issues across a board range of risk and repayment characteristics.

RFI (Request for Information)

The firm provides a formal description of its needs and asks selected providers to provide general information as to how they could meet the firm's needs.

Step 3 of the Risk Management Process: Quantify the exposure

The chief risk officer or other senior management must evaluate whether the organization can tolerate the risk, and whether the risk should be reduced, transferred, or eliminated. - Quantitative assessment is important in order to: ---> assess the materiality, or level, or the exposure (exp: high/medium/low) ---> Assess the estimated timing of the risk. ---> Identify the risk drivers or factors that cause the risk to materialize. ---> Determine the profitability or likelihood for losses due to the exposure. ---> Provide a benchmark for assessing risk mitigation strategies, generally in a cost-versus-benefit framework. - When quantifying materiality, a typical approach is to measure the cost or financial impact of a given risk. Material risks are those that exceed a predetermined level of financial impact or a predetermined level of risk to the organization. Materiality of risk exposure may vary significantly across firm characteristics and should be assessed and reevaluated on a regular basis. The materiality of exposure will normally drive the frequency and amount of monitoring and testing needed. - Qualitative assessment is important to the overall design of appropriate risk mitigation strategies from both an economic and an accounting perspective. A qualitative assessment should include: ---> Examine basic operating procedures to determine where mitigation strategies, such as hedges, may be useful (e.g., a balance sheet hedge matches exposed liabilities against exposed assets and is referred to as asset/liability management. ---> Determine how fundamental business processes contribute to risks and permit the identification of possible solutions. ---> Ensure that derivatives are structured and sized appropriately and proper accounting procedures are followed when derivatives are used as part of financial risk mitigation strategies.

Security of the payment

The collection system should ensure that the payment is not diverted or stolen during the collection process.

Costs of Issuance

The cost of underwriting or issuing common equity is significant when compared with other sources of capital.

Semi-repetitive wires

The debit and credit parties remain the same, but the description (e.g., a customer or an invoice number) may be changed, along with the date and the dollar amount. - these combine the controls of repetitive transfers with the flexibility of non-repetitive transfers.

Step 1 of risk management process: Determine Risk Tolerance

The degree of risk tolerance will vary across organizations. - examples: ---> To gain a competitive advantage, a new company in a rapidly evolving industry may be more aggressive in taking significant risks. ---> To protect an existing competitive advantage, an established company in a mature industry may be more cautious about taking risks. ---> Government entities and not-for-profit organizations may be averse to assuming even small risks. ---> A company's ability to accept risk may be limited by covenants or indentures in agreements or charters.

Earnings Credit Allowance and the ECR:

The earnings credit allowance is the total dollar value of credit that can be used to offset the service charges incurred during the analysis period. - it is calculated by multiplying the investable balance by the ECR for the period in question. - a commonly used basis for the ECR is the 90-day T-bill rate, but banks can base ECRs on their own internal requirements and rates.

Collections

The efficient collection of funds is a key aspect of liquidity management. - the collection system employed will depend upon the nature of the collecting firm and nature of the payee. - key considerations in any collection system: ---> speed of collection ---> security of the payment ---> availability of remittance information ---> cost of collection

Risk transfer

The essence of any risk transfer is a contract between a transferring organization (i.e., the transferor) and another entity (i.e., the transferee), under which the transferee agrees to pay designated types of the transferor's losses within contractual limits. - contractual transfer - guaranteed cost insurance program - retrospective (retro) rated insurance program

Non-repudiation

The inability of the sender or receiver of a message to deny having sent or received the message.

Review by Internal Audit and/or Compliance Group

The internal audit group typically reviews policies for compliance with financial controls and regulatory requirements, including SOX in the U.S. - Many organizations have a compliance group that is separate from the internal audit function and is responsible for reviewing the firm's adherence with existing laws and regulations. - In the investment area, the compliance group is often a required level of control, monitoring trading restrictions and licensing. - General operational policies may not require this review, especially if they have no direct impact on the financial statements.

regulatory disclosure (IPO disadvantage)

The level of disclosure required for an IPO can be costly and can reveal information that managers might prefer to keep unobservable. - for example, competitors may gain access to proprietary information, and outsiders may learn the compensation and net worth of the owners.

Review by Other Functional Area Managers

The policy should be reviewed and approved by the accounting and legal areas, as well as by any areas other than treasury that are impacted by the policy. - in addition, the policy should be reviewed by key financial managers in decentralized operating units. - the focus of this review should be on the operational implications of the policy.

transfer pricing

The price that subsidiaries of a large corporation charge one another for components sold among them. - the benefit for MNCs is that transfer pricing can be used as a mechanism to locate profits in subsidiaries in low-tax countries and to move them out of subsidiaries in high-tax countries. - the implication for management is that most transfer pricing for global subsidiaries must be done at "Arm's length". ---> this means setting transfer prices at the same level at which a firm would buy or sell similar products from an unaffiliated entity.

advantages of short-term financing/borrowing:

The primary operational advantages of short-term financing include ease of access, flexibility, and the availability to efficiently finance seasonal credit needs. - In addition, short-term loans generally have less restrictive covenants than long-term loans because a lender's money is at risk for a shorter period of time. - a short-term borrowing arrangement allows the borrower to maintain flexibility for future borrowing decisions. - in addition to bank credit, short-term financing can also be obtained from spontaneous sources such as accounts payable and accruals, which are referred to as spontaneously generated financing.

definitions

a policy should define all significant terms. - they are important to clarify the specific meaning of certain terms (e.g., whether the term year refers to a calendar year or fiscal year, or whether the term employee refers to all employees or full-time employees only).

Holding Period Yield (HPY)

The return earned by an investor during the period in which the investment is held. - can be calculated over investment periods (e.g., daily, weekly, monthly).

proxy (shareholder rights)

The right to vote at the annual meeting can be assigned to another individual through a proxy. - when shareholders are satisfied with the board's conduct and management's performance, they assign their proxies to the CEO or another designated company executive. - when shareholder groups aggressively solicit the proxies of other shareholders, it is referred to as a proxy fight.

Reputation Risk

The risk that customers, suppliers, investors, and/or regulators may decide that a company has a bad reputation and decide not to do business with that company.

Step 6 of Risk Management Process: Review and Modify the Strategy as Needed

The risks that an organization faces change over time and its risk tolerance may also change. - An effective risk management strategy must adapt to deal with these changes. - Any risk strategy should be reviewed periodically in light of the quantitative results of the risk management program to determine what, if any, changes are needed.

Voting rights

The sale of common stock may extend voting rights and control to a wider base of shareholders.

record date

the date when the firm looks at its records to determine its shareholders of record that are entitles to receive the declared dividend. - also known as a shareholder-of-record date

Average deposit float

The sum of the daily dollar amount of items (primarily checks) in the process of collection divided by the number of calendar or business days in the analysis period.

Average Collected Balance

The sum of the daily ending collected balances (both positive and negative) divided by the number of days in the analysis period. - in many account analysis statements, this item is calculated as the average ledger balance minus the average deposit float.

Capital Structure Theory

The trade-off theory's essential idea is that management "Trade off" the use of debt and equity in capital structures until the lowest WACC is obtained. - the mix of debt and equity that provides the lowest WACC is considered the optimal capital structure. - "Trade off" debt and equity → lowest WACC (target capital structure). - As debt is substituted for equity: ---> WACC first decreases, but at some point rises. ---> Less ability to pay dividends → want higher return. ---> Creditors charge higher interest rates. - Firm and industry factors (e.g., asset base).

Fee versus balance compensation

The treasury department must choose between compensating banks with fees or balances. ---> An analysis of the company's bank fees, earnings credit rate, and short-term interest rates, combined with company policy, will determine whether it is better to hold excess balances and reduce bank service charges or to maintain lower balances and increase short-term investments.

cash concentration system

The two major objectives of a cash concentration system are to efficiently move the funds from deposit banks to the concentration bank and to minimize excess bank balances. - Moving all the funds into a single concentration account enables those funds to be managed more efficiently and effectively, and facilitates daily liquidity management. - Concentration of funds enables a firm to: ---> balance excess and deficit cash positions across multiple locations, entities, and currencies. ---> optimize idle balances for offsetting fees or optimizing earnings credits. ---> invest a larger amount of funds, potentially increasing interest income. ---> pay down debt faster and minimize borrowings, potentially reducing interest expense. ---> take advantage of supplier and/or vendor discount terms, potentially reducing the cost of goods sold or operating expenses.

restrictions on managerial flexibility

The use of debt financing can reduce managerial flexibility. - for example, required interest and principal payments on debt must be paid in full and in a timely fashion or creditors have cause for action against the firm. - in the extreme, an inability to make required debt payments may lead to bankruptcy. - also, debt can be accompanies by liens on assets (e.g., mortgages), which limit management's flexibility.

Records retention

There are many regulations relating to the retention of records, especially for compliance with regulatory and tax authorities. - there are also severe penalties for failure to maintain proper work papers, especially those related to audit activity, bankruptcies, and many government investigations. - retentions policies also frequently include when and how specific key records should be destroyed. ---> for example, a firm may have a records retention policy that states, "Disbursement requests and supporting documentation will be destroyed five years after payment has been made." - In addition to a general records retention policy, other treasury policies and procedures documents should contain requirements for the appropriate retention, safekeeping, and destruction of records, where appropriate.

Service charges

These are the explicit fees or prices charged for services provided by a bank. - service charges are either expressed as a flat monthly fee or as a per-item or per-unit price. - in the case of a per-unit price, the unit price is multiplied by the volume to arrive at the analysis period today.

types of lines of credits:

They are either secured or unsecured, or uncommitted or committed. - also revolving credit line

Capital structure for not-for-profit organizations

They cannot issue common stock for equity financing, but they often have equity via accumulated retained earnings. - can also raise the equivalent of equity capital through government grants and charitable contributions. - in terms of debt financing, the availability of tax-exempt financing provides some NFPs with tax-based incentives to issue debt. - there may also be targets for the levels of short-term versus long-term debt in the overall financing of the NFP.

Which is true of T-bills, CP, and BAs?

They pay no interest but are issued at less than par value and pay par value at maturity. - All are discounted instruments.

treasury policies and procedures

They provide a framework for the design of workflows and controls that support operational, financial, and treasury management objectives. - The behavior of treasury staff cannot be regulated merely by declaration. However, assigning specific duties and documenting the assignment of those duties to designated parties provides a baseline for acceptable behavior. - the formalization of policies and procedures is one way for an organization to inform employees, agents, contractors, and vendors of the expected behavior related to certain specific treasury activities. - the standards outlined in an organization's treasury policies and procedures should be reviewed regularly for continues appropriateness and to make sure they incorporate relevant legislative, regulatory, or process changes/revisions. ---> in addition, they are often used as training tools to help document best practices and expectations.

ON-US/Account Number

This field contains the customer account number as assigned to the payor by the drawee bank.

Determine the objective (RFP)

This involves developing and articulating a clear understanding of the factors driving the required products or services. - such factors may be strategic or operational. - clearly defining the objective and identifying the key drivers will allow for an improved selection process.

Encoded Amount of Check

This number should agree with the amount written on the check by the payor. - The amount is typically encoded on the check by the depository bank and appears in the lower right-hand corner of the processed check.

Roles and Resposibilities

To provide a clear definition of the roles and responsibilities within the treasury function. - when problems occur, documented policies and procedures can provide some degree of protection for stuff that follow the approved procedures. - policies and procedures also provide clarity when dealing with accountability issues.

Risk management

To provide a control process to mitigate identified risks in the operation.

organizational needs

To provide a documented guide to best practices to ensure fundamental operational processes are performed in a consistent manner that meets the organization's needs. - policy statements are needed to grant and delegate the authority required to conduct treasury procedures.

Compliance

To provide an effective internal audit and control tool that helps ensure compliance with regulatory and legal requirements.

deposit deadline

the time within the banking day when an item must be ready for transit at the depository bank's processing center to qualify for the availability stated in the availability schedule.

Average Daily Float =

Total Dollar-Days of Float / Number of Days in Period

Risk transfer

Transferee agrees to pay for certain losses for fee or business contract. - Contractual transfer (hold harmless) - Guaranteed cost insurance program - Retrospectively (retro) rated insurance program

Liquidity Risk

Typically divided into two areas: funding liquidity risk and asset liquidity risk. - Funding liquidity risk related to an organization's ability to raise necessary cash to meet its obligations as they come due. It is often linked to the ability to raise short-term and long-term capital in a timely manner, and it typically is managed by holding marketable securities or through available lines of credit. ---> An example would be a corporation with an active commercial paper program. - Asset liquidity risk relates to the ability to sell an asset quickly and at close to its true value. ---> Especially a problem for organizations holding portfolios of investment assets, particularly if those assets are not fully liquid due to the type of asset or general market conditions.

Wholesale lockboxes

Typically process B2B payments. - do not handle the payment volume of retail lockboxes, the former must handle remittance information that is usually not machine-readable. - treasury professionals tend to use wholesale lockboxes when the dollar value of their payments is high, payment volume is lower, and the remittance info does not include a standardized remittance coupon.

Repurchase Agreements (REPOs)

Typically, a bank or securities dealer sells government securities it owns to an investor and agrees to repurchase them at a later date and at a slightly higher price. (repo agreement from the perspective of the entity selling the securities and agreeing to repurchase them at a later date) - short-term borrowing arrangement - typically involve the sale and repurchase of government debt. - they are classified as overnight, term (two days or longer), and open (no maturity date). - since each repo is negotiated individually between two parties, the maturity and yield on the repo can be tailored to each party's requirements. - taking legal possession of the underlying security also gives the investor a high degree of comfort, as repos can be sold if the selling counter party defaults on the agreement, which is referred to as settlement risk.

Account Analysis

US banks typically provider their corporate customers with imputed interest on demand deposit account (DDA) balances using earnings credit analysis (ECA) systems. - the rate used to calculate this imputed interest is called the earnings credit rate (ECR) and is typically negotiable as part of the initial selection process. - an account analysis statement serves as the bank's bill for services rendered and shows the process used to determine the fees charged and the earnings accrued during the period in question. - the account analysis statement typically provides the following information to a bank's commercial customers: ---> services provided ---> balances maintained ---> transaction/item volumes processed ---> charges assessed ---> earnings credit allowances

Commercial Paper (CP) Issuance

Unsecured promissory notes or highly rated corporations, financial institutions, or sovereigns. - In the United Stated, there are two types of CP programs, named after the sections in the Securities Act of 1933 that provide exemptions from registration of CP with the SEC. ---> An issuer under a 3(a)(3) program can issue CP up to 270 days in minimum amounts of $100,000. The proceeds of 3(a)(3) CP may only be used for working capital purposes. ---> An issuer under 4(2) program can issue CP up to 397 days in minimum amounts of $250,000. There is no restriction on how the proceeds of 4(2) CP may be used, including for construction expenditures or acquisitions. - most outstanding CP has a maturity less than 30 days, but issuers continually roll over the CP into a new issue at maturity. - CP programs are rated by the major credit rating agencies, which normally require each program to have a liquidity backup in the event that the market would not be available to issue or reissue CP for any reason. - CP can be issued directly by firms, but most CP is placed through dealers who market the CP to investors for a nominal fee. - CP is sold at a discount, meaning the interest paid by the issuer on the CP is deducted from the CP's face value when determining the proceeds that are available for use by the issuing firm. - the discount rate on CP is always calculated on a 360day basis. - other costs associated with a CP program include the dealer fees, backup credit facility fees, rating agency charges, and any credit enhancement costs. - firms with the highest credit rating rarely issue CP for amounts below $50 million, although individual issues under an overall program may be for smaller amounts.

Fee on Unused Portion (L/C) =

Unused Portion x Commitment Fee

RFQ (Request for Quotation)

Used by a firm to invite providers to bid on specific products or services. - similar to an RFP, but is best suited to products and services that are essentially standardized, which makes each supplier's quote easily comparable to others.

DDAs (demand deposit accounts)

Used to facilitate business activity including the transfer of funds or other payment-related activities. - sample methods of payment include cash, check, debit card, internal book transfer, or electronic transfer.

Repetitive Wires

Used when frequent transfers are made to the same credit parties. - Only the date and dollar amount of the wire change-- all other information remains constant. - The bank or treasury management system used by the treasury professional to originate the wire maintains a record of the debit and credit bank accounts and accepts instructions either electronically or via telephone to initiate the transfer. - A unique identified is assigned to each instruction template that contains all of the standing information. - Since only the date and the dollar amount can be changes on a repetitive wire, this type of transfer provides significant assurance that funds will not be sent to an unknown or fraudulent party.

Single payment notes

Usually granted for a short period of time and specific purpose, with both the principal and interest accounts paid at maturity. - because of the limited duration and precise maturity of a single payment note, a specific cash flow event is frequently identified as the repayment source at the time the funds are advanced.

Committed line of credit

Usually involves a formal loan agreement that specifies the terms and conditions of the credit facility. - It also typically requires compensation in the form of balances or fees because the lender is obligated to provide funding up to the credit limit stipulated in the agreement so long as the borrower is not in default. - a commitment fee may be assessed based on the total amount or unused portion of the commitment. - typically, payment is made quarterly with varying fees, depending upon the company's creditworthiness, the stated purpose of the line, and the commitment term.

Standby L/C

Variations of commercial L/Cs. - they are issued primarily by bank s. - once issued, it serves as a vehicle to ensure the financial performance of a bank's customer to a third-party beneficiary. - it is only payable in the event that the primary entity fails to pay or perform some specified duty. - typically requires the presentation of a sight draft and documentation that supports the beneficiary's claim of nonperformance on the part of the issuing bank's customer. - Performance L/C - Bank ensures performance of its customers

WACC

Weighted average of cost of funds for company. - represents the overall return that the market expects for the firm to provide. - Has many applications in the evaluation of capital investment decisions and in assessing overall firm value. - It is the basic target number that asset returns must exceed if the firm is to create value for shareholders. - is calculated by weighting the costs of the primary funding sources of permanent capital by their proportionate dollar contribution to the firm's capital base.

money order

a prepaid instrument issued by various third parties such as banks, postal services, or consumer outlets (e.g., convenient stores and check-cashing agencies). - the purchaser is the instrument's payor, and the money order is the obligation of the issuer.

exposure to market conditions (IPO disadvantage)

When a firm is publicly traded, the value of its equity shares are sensitive to capital market conditions. - even though a particular firm may be exceeding expectations, a broad sell-off in an industry or geographical region can reduce the value of the firm's shares of equity. - in turn, this can increase the likelihood of a takeover or merger. - Industry or market issue could create takeover risk

CDARS (Certificate of Deposit Account Registry Service)

a private service that makes it possible to receive full FDIC insurance coverage on amounts up to $50 million by distributing the funds among CDs issued by a network of banks.

Shareholder Control and Dilution

When capital is raised by issuing equity securities, the firm's earnings and the voting power of existing shareholders are diluted. - for this reason, managers may prefer to raise capital via debt to maintain the current level of control and distribution of earnings.

intercompany loans

When funds are required by a foreign subsidiary in a country whose government permits the transfer of funds for the servicing of a loan, the parent or subsidiary may loan funds rather than contribute equity. - Subsequent loan and interest payments effectively replace the dividends that the subsidiary cannot pay the parent company. - Should repayment of inter company loans also be restricted, an MNC can sometimes bring a third-party intermediary into the process. - inter company loans often produce tax advantages because foreign governments do not impose taxes on loan repayments, as would be the case with cross-border dividend payments.

LP (liquidity premium)

While the markets for most securities issued by large governments are very efficient and highly liquid, other securities are not as easily traded, resulting in higher transaction costs and, ultimately, lower liquidity.

Wire transfers

Wire transfers such as Fedwire in the U.S. or TARGET2 in Europe are an important disbursement tool for firms that need to make large-value payments that are immediate and final at the time of settlement. - Most banks provide a number of methods for originating wire transfers, ranging from telephone initiation to online systems. - To meet the needs of corporate users, banks generally classify wire transfers by usage category: ---> repetitive ---> semi-repetitive ---> non-repetitive (free-form) ---> drawdown ---> standing ---> book transfers

Book transfers

Wires between accounts at the same bank. - these transfers do not go through a system such as Fedwire, they are much less expensive than other types of wire transfers.

Payments fraud

`key issue related to disbursements. - disbursement products used to reduce payments fraud include positive pay and reverse positive pay. - Fraudulent endorsement

pin-based

a PIN debit transaction facilitates consumer authorization and authentication through the entry of a PINK at the POS terminal. - authorization and clearing are generally immediate and are facilitated by network operators, such as Maestro, interlink, NYCE, STAR, and ACCEL.

lockbox

a collection tool in which a financial institution or third-party vendor receives mailed payments at specified post office box addresses, processes the remittances, and credits the payments into a payee's bank account. - assessing the suitability of using a lockbox system or network requires a cost/benefit analysis to determine whether the net benefit of reduced collection float and/or elimination of in-house processing outweighs the incremental costs of lockbox processing. - 3 basic types: ---> retail ---> wholesale ---> hybrid (or "wholetail")

number of bank relationships

a critical concern for treasury management is maintaining the optimal number of banking relationships. - specific determinants include the organization's credit needs, the existence of multi-country operations, costs of maintaining multiple relationships, concentration risk (e.g., the risk of having a single point of failure), and the relative strengths and capabilities of each bank. - costs of multi-country operations: ---> Lead institution ---> Bank relationship profitability measures reduce costs for multiple services

increased transparency (IPO advantage)

a firm must meet certain disclosure thresholds (as determined by the SEC in the United States or by similar regulatory agencies in other countries) in order for its stock to become listed publicly. - transparency and outside regulation make investors more willing to purchase the stock of a publicly traded firm and enhance a firm's ability to raise equity capital.

scorecard

a management tool used to quantitatively measure the FSP's performance. - primary purpose is to provide feedback on the service provided and the benefit received. - allows the provider to better understand how the customer perceives the combination of the quality and cost of the services provided. - provides a tool to measure the relative value o current service relationships and evaluate FSPs on the issues that the firm deems to be important. - can be used in support f continuous improvement and communication between both parties, and as a way to clarify how well the services are delivered.

Yield

a measure of the return an investor derives from a financial instrument. - typically, an investment yield is stated as an annual percentage rate of return. - many factors influence the pricing an yield of an investment. these include default, liquidity, and price risk; the general shape of the yield curve; and the tax status of the investment.

Digital signatures

a message encoded with the sender's secret, private key that the receiver can use to identify the source. - as long as the private key is never shared with anyone, forgery of a digital signature is extremely difficult. - it is tied to a document and to the signer, meaning the signer's digital signature will be different for each document signed. - in the U.S., the E-Sign Act gave digital signatures the same legal status as paper/ink signatures, sometimes referred to as wet signatures.

policy attachments

a policy is most effective when it provides comprehensive information in the form of exhibits and appendices. - these normally consist of glossaries, distribution lists, procedures manuals, organization charts, standard reports, and any other information needed to support or clarify the info provided in the body of the policy. - it is important to keep the attachments as current as the policies.

Reverse positive pay

a process whereby the bank transmits a file of the checks presented for payment to the company on a daily or intraday basis. - within a specified time deadline, the company matches this file to a list of checks issued and notifies the bank of any items to be returned. - this service, however, does not prevent fraudulent checks from being cashed at the paying bank teller line (i.e., teller positive pay) since the bank fos not have access to the issue file. - when using a reverse positive pay service, the company and bank must agree on a default action if the company does not meet the required deadline -- that is, should the bank pay all or pay none, bearing in mind that in the case of reverse positive pay, pay none means that all checks presented that day will be returned, not just the exception items. - NOT available for ACH payments.

drawdown wires

a reverse wire transfer. - a request sent by a firm's bank to a second bank requesting that the second bank initiate a wire transfer from either the firm's account or another party's account at the second bank, sending the funds back to the first bank. - the party being debited must pre-authorize the transfer; therefore, these wires are most frequently used as part of a firm's concentration system, since the firm can authorize both sides of the transaction.

Payment system

a series of processes and technologies that transfers monetary value, using cash substitutes, from one party to another. - for non cash payments, the value being transferred is typically stored in depository accounts at a bank.

staggered election of directors (shareholder rights)

a system of staggered elections is when board members hold office for multiple years, but a minority of board seats are open in a single election. - these are used either to make it difficult to take over the board or because it is felt that continuity on the board is conducive to its making well-considered decisions.

Documentary collection

a trade payment mechanism that processes the collection of a draft and accompanying shipping documents through international correspondent banks. - instructions regarding the transaction specifics are contained in a collection letter that accompanies the documentation. - banks involved in these transactions perform different roles: ---> remitting bank: the bank of the exporter, receives the collection documents from the exporter. These documents are then remitted (forwarded) to the importer's bank along with instructions for payment. The importer's bank is referred to as the collecting or presenting bank. ---> collecting or presenting bank: (importer's bank, issuing bank) is the bank that presents the documents to the importer. In exchange for these documents, the bank collects either cash payment in the form of a bank draft or a promise of future payment in the form of a bill exchange. - A collection letter specifies the exact procedures to be followed before shipping documents are released to the importer. The importer usually requires physical possession of the shipping documents in order to obtain the merchandise. Documents are typically released either against payment or acceptance: ---> Documents against Payment (D/P): Use a sight draft, which is a draft payable on demand, that requires the collecting bank to receive full and final payment of the amount owed prior to releasing the documents. ---> Documents against Acceptance (D/A): Use a time draft, which is a draft payable on a specified future date, that must be accepted by the importer before the collecting bank may release documents. Upon maturity of the time draft, it is presented to the importer for payment.

FX risk

arises when investors purchase securities denominated in foreign currencies.

dashboards

a user interface or display that summarizes and presents information in a way that is easy to read and understand. - like a car's dashboard, it is often color coded to indicate the importance of specific information (green is normal and red requires immediate attention). - they are intended to provide summary data that can be used to manage a function or process and often include the ability to drill down on specific pieces of information to get more detailed information about the specific item. - for example, if one item on a dashboard is the number of payments over a specific dollar amount, clicking on the number would provide a detailed list of the individual payments. - intended to provide management immediate feedback on the overall status of treasury operations, while also publishing key financial information useful in running the business. - it should be short and easy to read, and while the actual metrics and information published will vary across firms, general categories of info may include: ---> interest, investment, and foreign exchange rates ---> cash flow and/or borrowing statistics ---> accounts receivable amounts by currency and/or customer ---> projected and/or large-dollar disbursements - principal challenges in implementing a treasury management dashboard include: ---> selecting the info and KPIs that are important to the specific organization ---> identifying the sources of info for each metric ---> automating the creation of the report so that it is produced and available in a timely manner.

large-value funds transfer systems consist of:

either RTGS systems or net settlement systems

external auditors

accounting firms audit financial statements and check mark-to-market valuations to increase the reliability of financial information used by investors and creditors.

Secondary market

after the initial offering is sold to investors, the securities can be bought and sold on the secondary market. - since the securities are bought and sold among investors, the issuing firm experiences neither a change in cash flow nor a change in the number of securities outstanding.

MAC Clause

allows the lender to prohibit further funding or even declare the loan in default if there has been an average change in the borrower's credit profile. (for letters of credits)

routing number

also known as the American Bankers Association (ABA) number of routing transit number (RTN), the routing number is a nine-digit code that identifies which financial institution the check is drawn upon.

par or face value

an arbitrary amount usually stated in the corporate charter that indicates the minimum amount stockholders have put up (or must put up) in the event of bankruptcy. - for many publicly traded companies, this is $1 per share or $0. The latter indicates no par value.

Spreadsheets

an essential tool for consolidating and analyzing the data that are essential to treasury. - the major advantages are their low initial cost, ubiquity, and ease of access and use.

High-yield bonds (junk bonds)

an investment quality rating of BB+ or lower from S&P, or Ba1 or lower from Moody's. - issued by less creditworthy entities. - consequently, they offer a higher yield to compensate for increased default risk.

departmental (unnamed) cards

another variation of a p-card in which each department has its own p-card for general use by that department. - the card is linked to the department rather than to an individual, and, unlike most cards, there is no individual's name on the card.

project financing

applied to large projects, often in the energy area (exp: energy exploration, refineries, and utility power plants). - this form of financing is commonly used for private infrastructure projects, such as stadiums, shopping centers, toll roads, and commercial or residential developments. - arrangement is complex, involving several companies or sponsors forming a separate legal entity to operate the project.

yankee CDs

are USD-denominated CDs sold by US branches of non-US banks. - they are typically sold through the New York branches of foreign banks and carry minimum investments of $100,000. - historically had a higher rate of return than comparable US bank securities, due to regulatory differences and a lack of reserve requirements. - provide geographic diversification in their portfolio.

Eurodollars

are USD-denominated deposits held in financial institutions outside the US. - may be issued as negotiable eurodollar CDs or nonnegotiable eurodollar time deposits, both of which are interest bearing. - historically had a higher rate of interest than comparable US bank securities, due to fewer regulations and a lack of reserve requirements.

intercompany dividends

are a movement of funds between related firms that may be subject to taxes or regulatory restrictions. - large firms with wholly owned subsidiaries often use inter company dividends to transfer profits from subsidiaries to the parent. - subsidiaries may be required to pay a stated percentage of earnings to the parent, although these may be subject to thin capitalization rules, which restrict payments to the parent if this would cause the subsidiary to become undercapitalized. - inter company dividend payments may impact covenants with lenders. - it should be noted that cross-border repatriation of dividends may not always be permitted by local regulators, and where permitted, may be heavily scrutinized. - tax consequences must be balanced with the profit potential, and firms should seek advice from qualified tax professionals.

Floating rate notes (FRNs)

are at the longer end of the money market maturity spectrum, with maturities typically of one year or longer. - pay regular coupons, as well as the promise of a return of their face value at maturity. - the actual return, or margin, on an FRN is a combination of the coupon interest rate and the capital gain or loss that results from an FRN transaction, since FRNs are traded on the secondary market at a discount. - if it is trading at par value, then the return is identical to the coupon rate.

collateral trust bonds

are backed by securities of other companies that are owned by the firm issuing the bond.

equipment trust certificates

are bonds that are secured by movable equipment (Exp: a fleet of trucks or railroad equipment). - each certificate is backed by a specific asset or group of assets (i.e. there is no blanket lien securing the issue)

merchant

are businesses that accept cards as a method of payment.

money market funds (MMFs)

are commingled pools of money market securities. - typically held by financial institutions, and investors purchase an ownership interest in the fund. - may be offered in the local currency or, where allowed by local regulator, in a foreign currency. - key characteristics include diversification and price stability. - usually maintain a dollar-weighted average portfolio maturity of 60 days or less, and do not hold securities with maturities exceeding 397 days. - in US, regulated by SEC, which under Rule 2a-7 restricts investments in MMFs by quality, maturity, and diversity. - generally have NAV set at one unit of the currency offering. as long as the NAV does not fall below one unit, referred to as "Breaking the Buck", the investor's initial principle is secure. - not risk-free assets, and funds can differ substantially in terms of risk, maturity, and return. - benefits: offer daily liquidity and pay dividends (usually monthly) based on the fund's average yield for the dividend period. - minimum investments tend to be substantially smaller than those required for direct investments in money market securities, so organizations can tailor their short-term portfolios to meet diversification and maturity requirements. - when interest rates are falling, MMFA managers may extend the maturities of new securities purchased in the funds portfolio to lock in yields. - can provide an organization with a low-cost, professionally managed, and marketable securities portfolio. - MMFs are more cost effective for many firms than managing a short-term investment portfolio.

convertible bonds

are corporate debt securities that can be converted by the holder, or sometimes the issuer, into shares of common or preferred stock at a fixed ratio of shares per bond.

hybrid securities

are created by combining the elements of two or more different types of securities into one. - most common types are convertibles and warrants.

purchasing cards

are credit cards used by businesses for the purchase of supplies, inventory, equipment, and service contracts. - typically used for various types of purchases (high or low volume) with spending limits established on an individual card basis. - also known as procurement cards or p-cards. - principal benefit to issuing company, is the replacement of the traditional time-consuming, labor-intensive, paper-based requisition process. - principal benefit for an employee is that goods and services can be obtained quickly and conveniently without a complicated purchase order process.

transaction processors

are critically involved in the flow of payments from issuers to investors (exp: payments of interest, principal, and dividends), as well as the record keeping involved in processing transactions.

token devices

are electronic devices that contain circuitry that encodes assigned user-specific information or personal information to help ensure password protection. - for example, one type of token contains a clock in a smart card that is synchronized to a clock on the host system where the data or application resides. - when the user wants to log on to the system, whether locally or from a remote point, the token provides a unique dynamic code that, when entered with the user's PIN or password, ensures that the user is authorized to access the system. ---> the unique dynamic code expires every few seconds and is replace with a new code. - the token may be a device that is plugged into a port on the user's computer and responds directly to the host system without the need for the user to enter, or even know, the challenge information. - devices specifically designed for this purpose are referred to as hard tokens. - soft tokens may also be used for authentication. - soft tokens rely on software installed on a computer, tablet, or mobile device. - the use of a token meets the "something they have" criteria of multifactor authentication.

multicurrency bonds

are issued as (1) currency option bonds that allow investors to choose among several predetermined currencies, or (2) currency cocktail bonds that are denominated in a standard basket of several currencies (exp: special drawing rights (SDRs)).

sub-sovereign bonds

are issued by any level of government below the national or central government, which includes regions, provinces, states, municipalities, etc. - bonds issued by government entities are usually in the form of general obligation or revenue bonds. - general obligation bonds are paid from the proceeds of general tax revenues. - revenue bonds are repaid from the revenues generated from specific public projects or services (Exp: stadiums, toll roads and bridges, or public utilities)

T-Bills

are issued with original maturities of less than one year. Bills are issued with maturities of 4, 13, 26, and 52 weeks. - newly issued T-bills are sold through a multiple-price, sealed-bid auction. - can be purchased on either a competitive or non-competitive basis. - dealer bid and ask yield quotes for T-bills are published daily.

OTC markets

are more decentralized than formal exchanges. - they also rely upon electronic communication to conduct trading activity in an auction-style market between participating brokers and dealers. - government, municipal, and corporate debt, and some equity issuances that are not traded on exchanges, are sometimes traded in this market.

traveler's check

are prepaid instruments similar to money orders. - two signatures are usually required by the purchaser: one at issuance and one at the time the check is used to pay for goods or services. - some issuers of traveler's check are replacing them with stored-value cards to improve processing times and reduce fraud.

foreign bonds

are sold in a particular country by a foreign borrower, but they are usually denominated i the domestic currency of the country where issued. - these bonds are primarily regulated by the authorities in the country of issue.

ERP Systems

are sophisticated information management, production, and accounting software packages that link different functional areas or operational divisions of a company on an enterprise-wide basis. - they integrate large amounts of data into a common database, which helps eliminate multiple, duplicate copies of information. - the greatest advantage of data into a common database, which helps eliminate multiple, duplicate copies of information. - the greatest advantage of ERP systems is that hey can provide a single processing platform for all of an organization's accounting and finance software, reducing the number of integration points required with stand-alone packages. - many include a TMS application, which may include the ability to directly connect to an organization's banks to initiate payments and other transactions from A/P and A/R, and to download and reconcile bank account information. - one of the advantages of ERP-based TMS solutions is the built-in integration with company's accounting and financial applications. - the disadvantages can include a higher cost and a need for significant information technology support.

representations and warranties

are the existing conditions at the time when the loan agreement is executed, as attested to by the borrower.

green bonds

are used by federally qualified organizations to raise funds to promote sustainability by developing underutilized or abandoned properties (exp: brownfield sites). - corporate bonds that designate proceeds for environmental projects, renewable energy projects, or making buildings more energy efficient are also known as green bonds.

tax increment financing (TIF) bonds

are used primarily for local financing in which a municipality may use all or a portion of new property taxes or sales taxes within a designated district to assist in the project's financing.

remotely created check (RCC)

are used to draw or draft against a payor's account. - the check is unsigned, and the payee, rather than the payor, initiates the transaction. - typically created for a one-time payment, such as a late bill payment or debt settlement. - because they do not bear a signature and can be created without the knowledge of the payor, they are vulnerable to fraud. ---> as a result, many banks refuse to accept them for deposit. - according to Reg CC and most clearinghouse agreements, any bank that transfers or presents this warrants that the check is authorized by the person on whose account the check is drawn. - Also known as pre-authorized drafts.

control (shareholder rights)

as owners of the firm, shareholders have the right to elect directors, who in turn select the officers to manage the business. - there are numerous regulations, which can vary by legal jurisdiction, concerning the election of directors and accompanying procedures.

collateral

assets used as security for the loan or bond issue. - may include physical assets or financial assets. - the condition of the assets must be monitored, their value must be appraised, and physical assets may require insurance.

ledger balances

bank balances that reflect all entries to a bank account, regardless of whether the deposited items have been collected and are available for withdrawal. - are important for accounting purposes, but not for funds availability or bank compensation purposes. - a negative balance results in a ledger overdraft, for which charges can be assessed.

TMS background

bank info is the core of a TMS regardless of how the data are received, and the real power of a TMS is the ability to collect, compile, synthesize, and relate the data to financial transactions and other treasury elements relevant to a particular organization.

bank portals and online banking solutions

bank-provided technology solutions offer functionality that can rival dedicated TMSs. - today, most of the bank-specific solutions have become online banking solutions typically offered over the internet. - while bank-provided solutions overcome many of the drawbacks of spreadsheets, they are typically more expensive than spreadsheets over time due to ongoing fees for the use of the system. - the major drawback to bank-provided solutions is that they are typically limited to dealing with only one bank. - transaction initiation and inquiry capabilities are normally limited to the bank that provides the application. ---> as a result, treasury operations that have multiple bank relationships may need to use multiple bank solutions, all with different security requirements and different user interfaces.

key aspect with both L/C and documentary collection:

banks are only reviewing documents for completion and accuracy of performance, no view of actual merchandise. - Doesn't deal with actual merchandise.

Which describes a bond issue, lists collateral, makes representations and warranties, specifies covenants and redemption terms, and sets interest payments or call provisions?

bond indenture

bond/credit ratings

bond issues and other long-term debt are assigned quality ratings that reflect the default probability associated with the issuer. - three aspects of ratings should be considered: ---> 1. the rating criteria used by the agency. ---> 2. the importance of the ratings to both the firm's investors and management. ---> 3. relates to changes in ratings

soverieng bond

bonds issued by a national government and are typically denominated in the currency of the issuing government. - carries credit risk, political risk, and potentially FX risk if issued in a currency other than the home currency of the investor

Financing the M&A transaction

can be financed using existing cash, equity, debt, or a combination of all three. - common structures include: ---> all-cash transactions ---> Stock transactions, financed through the exchange of stock ---> Mixed stock/cash transactions ---> Leveraged cash transactions, financed through debt issue ---> Leveraged buyouts, with the majority of equity replaced by debt ---> Debt transactions, financed through debt offered to the acquired company's shareholders ---> Mixed cash/debt transactions ---> Preferred stock transactions

Mail payments

can be processed internally or outsourced to a lockbox processor. - in an internal company processing center, check and/or payment card processing, along with deposit preparation, are performed in-house. ---> the primary advantage of an in-house processing center is that the firm maintains control of the collections operation. ---> disadvantages of in-house are the need to provides appropriate controls, potential processing delays of internal processing, and the need to add staff to handle peak volumes of transactions. - a firm may decide to outsource the processing of card payment information received through the mail due to compliance requirements. (if a firm uses in-house processing for card payments, it must meet PCI DSS requirements)

floating-rate debt

carry interest payments that reset periodically based on movement in a representative interest rate index, such as LIBOR. - usually stated as a spread above the base index rate (Exp: LIBOR + 3%) - Interest rate may be reset daily, weekly, monthly, quarterly, semiannually, or annually.

SWIFT messages

communications that are initiated and received by member banks. - these messages cover a wide range of international banking services and include balance reporting, letters of credit (L/Cs), documentary collections, and FX transactions.

warrants (bonds with an equity purchase option)

company-issued options that give the warrant's owner the right to buy a stated number of shares of stock at a specified price for a specified period of time. - most warrants are detachable, meaning they can be traded separately from the bond. - a bond with warrants has some characteristics of debt and equity, thus creating a hybrid security that gives a company the ability to expand its mix of securities and appeal to a broader group of investors. - warrants may dilute the value of the current stockholders' equity and the earnings per share (EPS). - SEC-requires that the disclosure of EPS include: ---> information on the Capital structure ---> explanation of the EPS computation ---> identification of Common stock equivalents ---> number of Shares converted ---> Assumptions made

Capital markets

comprise the component of financial markets in which firms issue debt and equity securities (in the forms of bonds and stocks, respectively). - provide a major source of funding for investments for many types of organizations in various countries.

cumulative voting (shareholder rights)

corporate bylaws typically permit one vote per share of stock and, sometimes, cumulative voting. - allows a shareholder as many votes per share owned as there are open positions on the board in the same election. ---> it allows shareholders to cast these votes in any way they see fit. - for example, if six board seats are to be filled, then the holder of one share receives six votes. - purpose of cumulative voting is to increase the possibility that a minority of shareholders can elect a board member.

cash management

daily cash management includes cash positioning, funding, and investment. - it starts with bank reporting, using SWIFT, BAI2, BTRS, or other standards/formats to gather previous day and current data from an organization's various banks. - once data have been collected, TMSs typically prepare and reconcile an organization's daily cash position based on bank and cash flow forecasting information. ---> most TMSs have the ability to provide a real-time or near real-time view of positions across banks, accounts, and geographies. - cash flow forecasting is an area of critical importance for liquidity management and is a good example of how technology can provide significant benefits for treasury. ---> a TMS should be able to accept direct input of forecast data by teams in a variety of locations, import data from the ERP or a data warehouse, and build a forecast based on past results. - in-house banking is another part of the suite of cash management capabilities provided by many TMSs. ---> in-house banking refers to the company, or more typically the treasury department, acting as a bank for a group of the company's operating businesses. ---> functions performed by an in-house banking function (IHB) can include cash pooling, inter/intracompany activity, and FX.

the cost of debt

debt financing is usually cheaper than the cost of equity. - this characteristic arises from the fact that creditors are paid before equity holders, in the event of liquidation. for this reason, creditors require a lower yield than equity holders.

securitization

debt instruments are commonly securitized to increase liquidity and to lower the yield paid by issuers. - these assets can be bundled to collateralize securities, making them more liquid and attractive to investors. - securitization of debt instruments has occurred because certain financial institutions have been willing to make a market in these instruments, in particular for commercial paper and high-yield bonds. - the resulting securities in a securitized structure are known as asset-backed securities (ABS).

defeasance of debt

defeasance removes debt from the borrower's balance sheet without retiring the debt issue. - in this arrangement, the borrower places sufficient funds in escrow, usually in government securities, to pay for interest and principal on the debt issue. - because control of both the debt and escrow funds is relinquished, and payment and retirement of the debt issue is now guaranteed, this debt and the related securities can be removed from the balance sheet.

market value per share

defined as the current price at which a share of stock is traded. - though this is not technically part of the accounting statements, it is often included in reports issued by a company and financial reporting services.

Book value per share

defined as the total book value of common equity divided by the number of common shares outstanding.

fleet cards

designed to be used for expenditures related to tucks and cars, such as fuel and repairs, and in some cases, other driver expenses, such as food and lodging. - often entitle users to fuel discounts and capture added info, such as vehicle mileage and location.

Continuous Linked Settlement (CLS)

developed to reduce the risks of working with counter parties. - this was developed as a solution to eliminate settlement risk. - it is a multi currency FX settlement service that allows a simultaneous exchange of the payments for both sides of the underlying financial transactions (exp: FX contracts, NDF contracts, and OTC derivative contracts)

zero-coupon bonds

do not pay interest and are subsequently issued at a substantial discount below par value. - sole cash outflow for the issuer is the repayment of par value at maturity. - advantages: no cash outflow until maturity and the issuing company received an annual tax deduction until maturity. - disadvantages: generally are not callable or refundable, and investors are required to pay taxes on imputed interest earnings each year, even though no actual payment is receiving until maturity.

Unsecured line of credit

do not require any collateral as part of the borrowing arrangement.

operating leases

established so that the lessor retains ownership of the leased assets at the end of the lease period. - the lessor provides maintenance for the equipment. - are often done on and off balance sheet basis, meaning that the lease payment is only reflected on the lessee's income statement. ---> neither the assets nor the lease appears on the lessee's balance sheet, while the lease payments simply appear in an expense on the income statement. - usually extend for periods shorter than the life of the asset (e.g., 3-5 years for equipment and up to 20 years for real estate). - important to consider the flexibility of cancellation policies.

exception management

even with a comprehensive policy statement, the possibility for required exceptions will still exist. - it is important that a policy statement identity who can approve exceptions and how they will be tracked and managed once they have been approved.

availability of collateral

firms with large, unencumbered asset bases can typically borrow at lower rates than companies of the same credit quality and rating that do not have assets to use as collateral.

rating agencies

for debt securities, rating agencies (e.g., S&P, Moody's, & Fitch) play a key role in determining the credit risk and the return offered by those securities.

derivatives

forwards, futures, options, and swaps can be used to manage interest rate and FX risks. - credit default swaps can be used to manage credit risk. - while proper use of derivatives can reduce the overall risk, the cost of using them will also reduce the potential profit.

Reverse repo

from the perspective of the entity that buys the securities with a promise to sell them back at a later date. - short-term investment arrangement

index bonds

have interest rates tied to an economic index and are often used when a high level of price inflation is present or anticipated.

Physical pooling

funds in separate subaccounts are automaticsllay transferred to/from a concentration account in order to eliminate idle cash and fund cash outflows. - the participating entities are either in surplus or deficit from a transactional perspective, but the bank accounts themselves have a balance of zero. - can be used across multiple legal entities located in the same or different countries, but the funds must be in the same currency and all accounts must be with the same bank. - the funds movement between the participating entities is accounted for via inter company loans, which must be at an "arm's length" or market rate. - there is no requirement that all the accounts belong to one entity, hence the need for inter company loans.

RTGS (real-time gross settlement) or large-value electronic payments

generally refer to wire transfers. - wires are processed individually and in real time (i.e., immediately). - wires have existed since the late 1800s with the invention of the telegraph, but did not become widely used until the early 1900s.

bank account management

good treasury practices require a secure handle on details of bank accounts, including signatories. - many TMSs offer a complete review and approval workflow to manage signature authorities for all accounts and produce the appropriate management, bank, and compliance reporting. - some TMS vendors offer analysis and monitoring of bank fees. ---> this capability is also available from certain specialized vendors but primarily for US banks, which typically use relatively standardized fee categories. The functionality allows users to analyze, reconcile, and manage bank fees to compare monthly fees against internal benchmarks.

mergers

happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. - this kind of action is more precisely referred to as a merger of equals. - the stock for both firms are surrendered, and new stock is issued in its place. - these do not happen very often.

term loans

has a fixed maturity (usually longer than a year) that can be repaid either in installments or in a single payment. - typically issued for a specific financing need, such as the purchase of a new plant or new equipment, or for general expansion.

open repo

has no maturity date, but rather either party can terminate the agreement on a day-by-day basis.

documentation

important documents that are integral to relationship management include account (board) resolutions, signature cards and service agreements, service level agreements (SLA), "know your customer" requirements (KYC), and statements of beneficial ownership.

government warrants

in government finance, a warrant is an order to pay that instructs a treasurer to pay the warrant holder on demand or after a maturity date. - warrants deposited in a bank are routed (based on the MICR line information) to a collecting bank that processes them as collection items. - the collecting bank presents the warrants to the government entity's treasury department for payment each business day. - in the US, warrants are commonly issued by state treasurers for payroll purposes, for accounts payable to vendors, for tax refund payments to taxpayers, and for payments to owners of unclaimed monies.

Emerging payments

include mobile wallets, mobile (phone) payments, person-to-person payments, and virtual currencies. - mobile wallets (e.g., Alipay, Google Wallet, Apple Pay) use smartphones and tablets equipped with near field communication (NFC) chips or a bar code. - mobile payments allow a user to set up an account with a cell phone provider and transfer money via text message. ---> a personal identification number (PIN) is used for security. - mobile payments do not require a smartphone or a bank account, making the system popular in developing and underbanked countries. - person-to-person payments may be initiated by the payer through a bank, a nonbank intermediary, or a credit card network.

the all-in or total costs to issue CP:

include the interest rate implied in the discount, a dealer fee, and a fee for credit enhancement in the form of a backup or standby line of credit.

key participants in capital markets

include the issuers of securities, investors purchasing securities, broker-dealers that help capital markets function, and regulators that ensure regulatory compliance.

short-duration mutual funds

invest in securities with maturities that exceed the maturities of most money market instruments. - while this longer investment maturity offers the prospect of higher returns, it also exposed the investor to increased price volatility. - do not typically have a fixed unit currency value. - avg maturity of securities held in this fund portfolio is between 1 and 3 years. - these funds place the majority of their holdings in specific types of instruments, such as government issues, CDs, or CP.

Which type of investment risk includes price risk and reinvestment risk?

interest-rate risk

cash payments

involve currency and coin, and are used by consumers to settle small transactions. - typically self-settling, meaning that the physical transfer of cash provides the clearing network that leads to final settlement (i.e., no banking network is used). - in some countries cash represents the prominent payment method for purchasing transactions and for payroll. - a popular misconception is that these payments are less expensive than other types of payments. - these type of payments represents a security risk. --> cash receipts must be safeguarded at the collection point until they can be transported to a bank and deposited into the company's bank account. ---> the cost of this process, which includes items such as locked cash drawers, dual-control procedures, specialized safes, and armored cars, can actually be quite high. - cash is a high-cost payment method for most companies.

Secondary market transactions

involve previously issued securities.

maturity matching

involves matching the life of a debt issue to the life of the specific assets financed. - matching maturities reduces the overall firm risk. - the primary risk from a maturity mismatch results from long-term assets being funded with short-term sources.

Check conversion

involves scanning the payor's check and converting it to an ACH debit. - the benefit of this is that ACH transactions are typically less expensive than check processing. - checks can be converted at the point of presentment or in a lockbox operation. - check conversion is only available at US banks and is limited to checks drawn on US-domiciled accounts. - Check conversion is limited to consumer checks under $25,000.

interest rate risk

involves the uncertainty associated with future interest rate levels. - has two components: reinvestment risk and price risk - potential for lower interest rates results in reinvestment risk. - price risk refers to changes in interest rates having an adverse impact on the value of a security. ---> refers to the potential for an increase in interest rates.

eurobonds

is an international bond that is denominated in a currency other than that of the country in which it is issued. - sometimes called an external bond - exp: a Eurodollar bond that is dominated in US dollars and issued in India by a UK-based company.

Off-balance-sheet financing

is designed to provide financing that does not appear on the balance sheet. - this arrangement may be used by firms with high debt levels or that have been restrictive covenants on the use of additional debt. - past examples include joint ventures, research and development partnerships, sales of receivables, and operating leases.

debit card

issued against a deposit account belonging to the cardholder. - are either signature based or pin-based

credit card

issued against a line of credit that the institution or merchant has extended. - charge cards are a special type of credit card in which the outstanding balance must be paid off each month. -two primary bank-issued cards: Visa & MasterCard - main nonbank card: American Express (AMEX) - China UnionPay is the principal bank card agency in China

card issuer

issuing banks underwrite and issue cards to individual and business cardholders who meet credit standards, or in the case of debit cards, hold bank accounts with that financial institution.

liens

legal claim of the lender on the assets used as collateral in the event it cannot take physical possession of the assets. - can be in the form of mortgage or larger assets or a blanket lien against inventory and receivables. - to ensure these claims are valid and enforceable, the lender must generally follow a legal process to establish the claim by filing notice with the appropriate governmental agency, which makes the lien legally enforceable.

network operator

maintain communication networks to support card transaction activities, such as authorization, clearing, and settlement. - include visa, mastercard, discover, star, nyce, pulse, accel, interlink, and others.

acquiring processor

many merchants and merchant acquiring banks use third-party processors to manage the daily settlement, as well as the information flows, related to credit card activities.

short-term funding alternatives

mature within one year and are generally used by firms to finance current assets such as accounts receivable and inventory. - trade credit - inter company loans - selling of receivables - supply chain finance - commercial bank credit - single payment notes - repurchase agreement (REPO) - CP issuance - Asset-based borrowing

medium- or intermediate-term notes

maturities ranging from two to ten years. - in most cases, these notes pay interest at periodic intervals (exp: semiannually) and are similar to long-term bonds except for the shorter maturity. - they are marketable, or liquid, securities because they are traded actively.

term repos

may have any maturity agreeable to both parties, but they are rarely for periods of more than a year.

events of defaults

may occur if a borrower breaches or violates any term or condition under a debt agreement. - characteristics of these include: ---> cure periods: often specified in the agreement, provide a period of time in which an event of default may be corrected before the lender may pursue default remedies. ---> remedies: available to a lender normally include an acceleration of all principal and interest on the debt when a default occurs. ---> waivers of default: may be given at the lender's discretion, typically for a fee or change in terms.

disbursement systems

may range from a single bank account for a small business to a very complex system with multiple banks, accounts, payment methods, and products for a large corporation. - disbursement products: ---> DDAs (demand deposit accounts) ---> ZBAs (zero balance accounts) ---> controlled disbursement ---> imprest accounts

RTGS (real-time gross settlement) systmes

means that the clearing and settlement of each transaction occur continuously during the processing day. - payment to the receiving participant (payee) is final and irrevocable when the RTGS processor (central bank or equivalent) either credits the amount of the payment order to the receiving bank's account or sends notice to the receiving bank, whichever is earlier. - large-value RTGS payment systems are used by companies to facilitate major transactions that are time sensitive and whee the irrevocable receipt of value is required. - examples: Fedwire (US), CHAPS (UK), LVTS (Canada), CNAPS (China)

long-term bonds

typically issued with maturities of 10 to 30 years. - bought and sold on the secondary market. - most pay coupons, which means that the issuer must make semiannual interest payments at a fixed coupon rate over the life of the bond. - they are customizable

payments

meeting operational, compliance, and documentation demands for making basic payments can be time consuming, especially when multiple banks are involved, with a variety of access devices and user credentials. - TMSs can help by providing the basic payment origination functionality and by connecting to a company's various banks. - some organization's use their TMS as a payment factory to collect payment transactions from across the organization and then sort/transmit them to the appropriate banks and payment channels. - multilateral netting is a tool some companies use for managing inter/intracompany payment activity on a cost-effective basis.

payroll services

numerous vendors offer payroll services that handle many payroll functions, including check and direct deposit file issuance, payroll tax filing and payment, expatriate (expat) payroll, and retirement/pension account administration. - these services also provide employees with the required withholding forms for tax purposes. - many small to medium sized businesses outsource payroll because it is often a cost-effective and convenient service.

daylight overdrafts

occur when financial institutions permit corporations to make payments that exceed the available balance. - these overdraft positions are usually eliminated by funds that arrive later in the day. - financial institutions should carefully examine the creditworthiness of a customer before allowing this.

stock dividends

occur when shareholders are paid dividends with additional shares of stock, as opposed to cash. - the stock's per-share price in the market is reduced because additional shares are in circulation, but there is no real impact on shareholder wealth since the added shares do not alter the firm's overall value. - the dilution in earnings caused by the stock dividend will cause a fall in share price that is proportionate to the increase in the number of shares outstanding. - if a firm is in a period of rapid growth and needs to retain all earnings for reinvestment, stock dividends may be a means of compensating shareholders for their loyalty.

stock splits

occurs when an existing share is split into more than one share at a reduced share price. - basic idea behind this is that an optimal trading range exists for a stock's price. - when management deems that the share price has become too high for smaller shareholders to purchase the stock in round lots (multiples of 100 shares), it will recommend to the board of directors that the stock be split to reduce the share price. - a negative aspect of a stock split is the subsequent earnings dilution. - firms with declining share prices occasionally initiate a reverse split to increase share price.

gross settlement

occurs when each transaction results in a separate value transfer between the payor and payee.

nett settlement

occurs when many transactions are combined and then sorted by sending and receiving banks.

primary markets

offer newly issued debt and equity securities to investors when firms or government units sell securities to raise funds. - new issues increase the issuer's level of outstanding stock or outstanding debt. - if new stock shares are sold by a company with shares already trading on an exchange or the over-the-counter (OTC) market, then the new shares are referred to as a seasoned equity offering (SEO) or follow-on issue. - if a firm issues equity shares to the investing public for the first time, the issue is termed an initial public offering (IPO)

Primary market transactions

offer newly issued debt and equity securities to investors.

convertibles advantages:

offer the ability to sell debt with lower interest rates and fewer restrictive covenants in exchange for allowing the investor to participate in potential capital gains as firm value increases.

refinancing

often done following periods of high interest rates. - durng high interest rate periods, many issuers attach call provisions that allow the bonds to be redeemed prior to maturity. - when interest rates fall, companies issue new bonds at a lower interest rate and use the proceeds to retire the older, higher-interest bonds. - primary purpose of this is to take advantage of falling interest rates.

small-value electronic payments

often referred to as automated clearinghouse (ACH) payments. - introduced in the early 1970s as a means to replace checks. - ACH payments are value-dated and processed in batches, and typically take one to two days to settle. ---> same-day ACH is available in the U.S. for domestic payments of $25,000 or less. - originally ACH payments were intended for "small" payments, such as payroll and consumer transactions. - today, however, the lower cost of ACH transactions has motivated many companies to replace wires and other payment types with ACH transactions.

required controls and compliance considerations

one of the key aspects of developing polices and procedures is to ensure proper controls for processes used in the area in question. - mandating a policy will not ensure compliance without appropriate oversight and controls. - this section should also specify the external regulatory requirements that are addressed by the policy.

tender option bonds

or put bonds, allow the investor to redeem the bond either once during its life or on specified dates. - these bonds are usually redeemed at par value.

control (IPO disadvantage)

owners of closely held firms surrender some control by going public, even if majority ownership is retained. - also, there are many examples of publicly held firms being taken private by management to increase control.

checks or drafts

paper-based payments initiated when one party writes a check to pay another. - although they are one of the oldest forms of non-cash payment systems, they are still used throughout the world and are most widely used in the U.S.

total amount of stockholder's equity =

par value + retained earnings + additional paid in capital

income bonds

pay interest only if a company has profits, thus reducing the issuer's risk of issuing debt.

Card-based payments

payments that settle through one of the large card-processing networks including Visa, MasterCard, China UnionPay, or American Express. - they may also settle through one of the ATM (automated teller machines) or POS (point-of-sale) systems such as STAR, NYCE, or PULSE in the United States, Interac in Canada, or Telstra in Australia. - today, card payment methods come in a variety of alternatives, including debit cards, prepaid cards, purchasing cards, virtual cards, ghost cards, and payroll cards -- some of which, despite the name, no longer use a physical card.

medium-and long-term borrowing

primary sources are term loans, intermediate notes and bonds, and long-term bonds.

review cycle

procedures change and evolve over time and the related policies must also change. - an essential item in any policy is a statement of how frequently the policy will be reviewed and what approvals will be required (e.g., "this policy will be reviewed by the CFO annually and all changes approved by the board of directors"). - the date of the last review should be included in the policy itself.

payee's bank

processes the transaction on behalf of the payee and generally holds the value in an account. - also referred to as the depository bank

payor's bank

processes the value transfer on the payor's behalf. - also known as the paying bank

issuer processor

provides a system for card issuers to board accounts, provides authorizations, and offers risk management tools to issuers to manage their card portfolios effectively.

preemptive right (shareholder rights)

provides that existing shareholders will have the first right to purchase shares of any new stock issue on a pro rata basis that is based on the current proportion of shares owned. - existing shareholders do not have to exercise the right, but they do possess a right of first refusal.

merchant acquirer

qualifies businesses that accept credit card payments. - this bank provides merchants with credit card terminals, which may be purchased or leased, and maintains deposit accounts through which the credit card payments settle.

default or credit risk

refers to the likelihood that the payments owed to creditors will not be made under the original loan terms.

r =

r*rf + IP + DP + LP + MP - r is the underlying cost of debt

After-tax rD =

rD(1 - T) - T = firm's marginal income tax rate - rD = yield to maturity on newly issued debt on a before-tax basis

CAPM:

rE = rRF + (rM - rRF)B

cardholder

receives a card from the issuing bank.

collected balances

refer to the average ledger balance minus the deposit float. - neither collected balances nor deposit float are regulatory terms. - rather, they are items used by US banks to determine earnings credits on account analysis statements. - = average ledger - deposit float

disbursements, collections, and concentration:

refer to the movement of funds throughout the various working capital accounts.

disbursements

refer to the payment of funds to employees, suppliers, tax authorities, capital markets, etc. - a primary concern in the management of disbursements is control. - are outflows - disbursement processes include both the payment initiation and the reconciliation of the payment.

Money markets

refers to a global marketplace for short-term financial investments that are easily converted to cash (i.e., highly liquid). - money market securities have a maturity of one year or less and are generally debt instruments. - examples include negotiable certificates of deposit, banker's acceptances, government securities, commercial paper, municipal notes, federal funds, and repurchase agreements.

Domestic collection

refers to payments received from customers and trading partners that are located within the same country as the collecting company. - domestic collection products include: ---> merchant services ---> Remote Deposit Capture (RDC) ---> Check conversion ---> Mail payments ---> Lockbox

Dollar discount

refers to the difference between its par value (i.e., the amount received by the investor at maturity) and the purchase price. - is important because many money market securities do not pay interest and instead sell at a discount from par value (e.g., T-bills, commercial paper, and banker's acceptances). ---> these are referred to discounted instruments.

liquidity risk

refers to the likelihood that a security cannot be sold quickly without incurring a substantial loss in value. - primary determinants of liquidity are marketability and maturity.

Settlement

refers to the movement of funds from the payor's account to the payee's account. - the payee can use the money involved at settlement. - the term availability can also refer to settlement. - settlement transitions to finality when a payment is unconditional and irrevocable.

concentration

refers to the movement of funds throughout the firm's various accounts following the collection of cash into one centralized account.

Finality

refers to the point in time at which the funds cannot be taken back or retracted by the payor or the payor's bank. - varies depending on the payment system and the parties involved in the transaction.

Merchant services

refers to the services offered to help in processing credit and debit card transactions. - while they normally refer to the acceptance and processing of card transactions, it also often includes ancillary services such as returns and adjustments, point-of-sale terminals, supplies, and customer support. - merchants that accept mail, phone, or internet orders made with card payments may mitigate their risk of fraud by using an address verification service (AVS) that matches the address provided by the cardholder with the account billing address on record with the issuer.

Available balances

reflect the amount of funds available for withdrawal from an account, based on the bank's availability schedule and/or local regulations that require specific availability for certain funds (e.g., reg CC in the U.S.; other countries may have similar regulations.) - may also include overdraft lines of credit.

standing wires

repetitive transfer instructions are established to move funds between two specified accounts automatically when previously determined criteria are met. - typically are used for concentrating funds, and the criteria could address either timing (e.g., all funds in the account at the end of the day) or a designated balance level (e.g., all funds in excess of $50,000)

investors

represent the demand side of capital markets, and they purchase and hold the securities sold by issuers. - generally are characterized as either retail or institutional investors. - retail investors include individuals buying small amounts of stocks or bonds for their investment portfolios. - institutional investors are generally large-scale investors, such as mutual fund companies, insurance companies, money managers, pension funds, firms, and banks.

Retained earnings

represent the earnings, net of dividends paid to shareholders, accumulated since a firm's inception. - this balance sheet account is part of stockholders' equity and is an accounting of the money reinvested in the firm in lieu of dividends paid out. - are recorded as an accounting entry in the equity section of the balance sheet to reflect profits that have been reinvested in the firm. - do not represent an available pool of funds though.

issuers of securties

represent the supply side of capital markets. - issuers of debt securities are borrowers, while the issuers of equity securities are selling ownership in their enterprise. - governments (ministries of finance) and central banks: issue debt securities - corporations: issue debt and equity securities - state-owned enterprises: issue debt securities - sub-sovereign entities: issue debt securities - mutual fund companies: issue debt and equity securities

treasury stock

represents shares of common equity that have been reacquired by the issuer. - it may be held in the firm's treasury indefinitely, reissues to the public, or retired. - receives no dividends and does not carry voting power. - it is considered issued, but not outstanding; therefore, it is deducted from any capital calculations.

sinking funds

require issuers to call, or repurchase on the open market, a portion of the outstanding bond issue each year. - this amortizes the bond's issue over its life. - the existence of a sinking fund arrangement generally increases the safety of the bonds and lowers the required interest rate.

Secured line of credit

require the borrower to pledge some form of collateral, most often current assets such as receivables or inventory. - availability under some of these lines are limited by a borrowing base (sometimes referred to as the loan value) that is negotiated as a percentage of the value of the collateral securing the line.

debit filters and blocks

restrict a perpetrator's ability to use a stolen routing transit number and account number to withdraw money from the account using an ACH transaction.

acquisition

results when one firm buys a majority of the voting shares of another firm. - may be friendly or hostile

private markets

securities are not underwritten but are sold to a limited group of institutional investors. - generally require that private-placement securities only be sold to a limited number of high net worth investors or to be qualified institutional investors (QIIs), referred to in the US as qualified institutional buyers (QIBs).

availability schedules

specify, for each drawee endpoint, when a bank grants available credit or collected balances for deposited items. - each bank sets its schedule based on its processing schedules, capabilities, and pricing decisions. - most banks assign availability using the proof-of-deposit (POD) method, in which availability is assigned to each check as it is processed. ---> availability is determined based on the time and day of deposit and the check's drawee endpoint. - some banks may negotiate special availability for selected, high-volume customers.

When the product requested in an RFP will clearly be used only by treasury, what will involving operations, tax, legal, accounting, IS, compliance/audit, and procurement likely do?

strengthen the process.

E-Commerce

the application of information and secure network technology for the purpose of facilitating business relationships, including buying and selling, among trading partners. - encompasses many types of channels and communications protocols, including traditional electronic data interchange (EDI) and web-based commerce.

lease versus borrow-and-buy decision

the appropriate way to evaluate this decision is to compare the present value of the costs of leasing with the present value of the costs of owning the asset. - the decision maker should then select the alternative that maximizes firm value. - NPV of cash flows for each alternative

information security

the assurance that all information and messages are safe from intrusion, detection, and modification. - security is often required for regulatory and compliance purposes, and must provide a number of basic elements. - these basic elements include: ---> privacy ---> authentication ---> authorization ---> integrity ---> non-repudiation

Privacy

the assurance that information is only accessible by authorized individuals and will not be used for unintended purposes.

account resolution (board resolution)

the basic account or service authorization empowering a representative of the firm to enter into agreements for financial services. - passed by the board - the resolution specifies the functions that can be performed by specific individuals or job titles, the people authorized to open and close accounts, and the entire scope and limitations of the relationship. - may be general or specific with regard to actions that the FSP may take on behalf of the firm.

friendly acquisition

the bidder will typically inform the other firm's board of directors of its intention to acquire. - in a friendly acquisition, with the board of the target firm cooperating, the acquiring firm may conduct extensive due diligence into the financial and other affairs of the targeted firm. - the potential acquirer may negotiate directly with the target firm's management.

close-loop cards

the card is accepted only by the issuing company. - cards issued by gas companies, department stores, and other retailers.

Speed of collection

the collection system should minimize the time it takes to collect the actual payment and have the funds available for use.

non-repetitive transfers

the debit and credit parties are different each time. - because all of the information is variable, this type of transfer has the highest degree of payment risk due to fraud or simple data entry errors. - as a result, additional security measures are typically required to guard against both fraud and input errors. - examples of such measures are callbacks, secondary levels of approval, and segregation of duties. - also referred to as free-form wires.

spread

the difference between the ask and bid price. - represents the dealer's profit on a specific transaction.

effects of interest rate levels and forecasts

the general level of interest rates and economic activity impacts both the use and cost of debt. - also, the forecast of future interest rates impacts both the type of capital raised and the provisions that may be attached to capital issues.

promissory notes

the legal portion of the debt contract, which is an unconditional promise to pay a specified amount plus interest at a defined rate either on demand or on a certain date. - can be issued for each individual borrowing or for a total line amount against which multiple borrowings exist. - example: a master note, used to simplify the paperwork connected with loans that have multiple advanced features, such as lines of credit and revolves.

endpoint

the location of the paying bank where final settlement occurs. - displayed in the routing information, such as the RTN or sort code on the check.

valuation of capital market securities

the market value of a financial security equals the present value of the expected cash flows derived from the security. - to arrive at the present value, expected stream of cash flows is discounted by the required rate of return that the market believes is commensurate with the security's level of risk. - if the present value exceeds the security's current price, then the investor would seek to purchase the security. ---> meanwhile, the investor would seek to sell the security if the present value is less than the security's current price. - market value = PV of anticipated cash flows

open account

the most common form of credit extension and collection. - widely used internationally when two trading partners have an existing relationship and essentially trust each other to complete their transaction obligations. - when there is no such relationship, a seller will often require credit risk protection through either a letter of credit or documentary collection.

cash dividends

the most common form of dividend payment is a regular cash dividend. - usually are paid on a quarterly basis. - historically, they were paid by check, but are increasingly paid electronically.

cross-border collections and trade

the most frequently used cross-border trade payment mechanisms can be explained in terms of increasing levels of protection, complexity, and cost. - open account terms are the simplest and least costly, but offer the least protection for the seller. - documentary collections are more complex and costly, but offer some protection to both parties. - letters of credit, which typically include documentary collection as part of the process, are the most complex and costly vehicles for international trade, but they provide the best combined security for both parties. - other methods include: ---> banker's acceptance (BA) ---> Trade acceptance ---> barter, countertrade, trading companies

objectives

the objectives for the policy should be clearly stated at the beginning of the policy document.

managing the equity portfolio

the passive and active approaches are two common strategies for managing the equity portfolio. - the passive approach is basically a buy-and-hold strategy, while an active management approach attempts to outperform, on a risk-adjusted basis, a benchmark portfolio. - the risk associated with an investment in common stock is the possibility that the realized return on the stock may differ from the expected return. stocks with higher return variability are riskier than stocks with lower return variability. ---> The variability in returns is typically measured with the statistic known as the standard deviation. - when a common stock is owned in combination with other common stocks in a portfolio diversification is needed. ---> as more stocks are added to the portfolio, the overall riskiness and variability of the portfolio is reduced. - CAPM

Bid price

the price or yield at which the dealer will purchase a security.

Ask price

the price or yield at which the dealer will sell a security.

roles and responsibilities

this section should provide a clear listing of the roles and responsibilities of the key participants in each policy. - included in this section should be an outline of the lines of authority, delegation and segregation of duties.

payee or beneficiary

the receiver of the payment whose account is credited (increased) for the value of the transaction.

foreign exchange (FX) risk

the risk of a change in the exchange rate between the currency in which a security is denominated and the investor's local currency (applies to foreign currency investments only).

asset liquidity risk

the risk that a security cannot be sold quickly without experiencing an unacceptable loss.

price/interest rate risk

the risk that arises when there are changes in interest rates for securities that are identical or nearly identical to portfolio securities.

credit or default risk

the risk that payments to investors of a security will not be made under the original terms of the security.

regulators

the role of regulators is critical to the maintenance of fair and open markets. - the regulators that monitor capital markets are generally different from those that monitor the banking markets, and may even be different from those monitoring the money markets, depending on the country. - key capital market regulators in the US include the SEC, FINRA, MSRB (municipal securities rulemaking board) - in most cases, the role of capital market regulators is to require issuers to provide consistent and transparent disclosure of financial information related to the securities traded and to ensure a fair and level playing field for all market participants.

scope

the scope of the policy should define, as precisely as possible, the areas and processes the policy will cover.

outsourced (external) management

the short-term investment portfolio duties are assigned to a third-party provider, such as an MMF manager or an outside money manager. - While management costs or fees will be incurred(e.g., 10 t0 100 basis points), these fees should be balanced against the cost needed to hire and maintain appropriate internal expertise. - a potential issue with using MMFs: the manager's investment choices may not be completely aligned with the client's preferences. - other issues can include compliance monitoring and general due diligence with regard to the safety and soundness of the outside management firm. - if a broker-dealer is hired to manage a firm's short-term investment portfolio, then the firm's management must recognize that the broker-dealer does not have a fiduciary duty to always act in ints client's financial interest. - a firm's management may use a registered investment advisor to manage the short-term investment policy. ---> an investment advisor has a fiduciary duty to its clients that a broker-dealer does not. Still, it is best practice for management to periodically review the portfolio with the outside manager to verify compliance with the short-term investment policy.

increased liquidity (IPO advantage)

the stock of closely held firms is very illiquid. it can be sold only to certain types of investors; hence, there is no intermediary to help in the sale. - as a result, such firms have a weakened ability to raise capital when needed. - going public can help resolve this liquidity problem.

Average ledger balance

the sum of the daily ending ledge balances (both positive and negative) divided by the number of days in the analysis period. - balances used in the calculation are net of any current-period adjustments.

ledger cutoff time

the time of day when a deposit must be received in order to be posted to the ledger balance of the depositor's account. - this time can vary within a bank depending on where and how the items are received. - items deposited after this time are considered to be received by the bank on the following banking day.

checks

the traditional method that payors, also referred to as makers (because they "make" the check), have used to access their bank accounts. - while overall check volume is declining, checks are still the primary payment method used for B2B payments in the U.S. - are also used in many other countries around the world, but the overall volume of checks is much lower in those countries than in the U.S. - depending upon the country, funds from check payments are usually available to depositors in one or two days, but finality can take several weeks or longer, due to stop payment orders and overdraft returns by the paying bank.

single-use cards

these card numbers look like regular credit card numbers, including embedded expiration dates and securi codes, but they will only work for a single use. - often used for travel and entertainment, and by accounts payable departments to pay vendors. - since the number is only good for a set amount and a set period of time, it is a mechanism for fraud control.

travel and entertainment (T&E) cards

these credit cards are used by businesses for employee travel purposes. - may be incorporated into a company's p-card program, or they may be issued as a separate card. - these programs may allow the firm to earn travel points. - can often have restrictions on use based on company policy.

stored-value cards (SVCs)

these debit cards may be offered by financial institutions, retailers, and other service providers, and they can be branded, open-loop cards, or private-label, closed-loop cards. - another type is the payroll card, offered to employees who do not have bank accounts - can be reloadable or non-reloadable - another use for these is for employee benefit programs, such as flexible spending accounts and health care expense reimbursements.

open-loop cards

they are accepted anywhere the card logo is displayed. - in general, bank-issued cards, Amex, and Discover

capital leases (finance leases)

they are essentially an alternative to borrowing the funds and purchasing the asset. - For US firms, Accounting Standards Codifcation (ASC) Topic 840-10-15: Leases: Scope and Scope Exceptions specifies that a lease meeting any one othe following gour conditions must be classified as a capital lease: ---> 1. the length of the lease is at least 75% of the estimates useful life of the asset. ---> 2. There is a transfer of ownership to the lessee at the end of the lease. ---> 3. The lease agreement contains a provision that allows the lessee to purchase the asset per a bargain purchase option during or at the end of the lease's life. A bargain price is one that is sufficiently less than fair market value, such that an expectation is created at the outset that the option will be exercised. ---> 4. The present value of the discounted lease payments at the beginning of the lease term exceeds 90% of the asset's fair market value. - the residual value is generally the estimated value of the asset at the end of a capital lease. - a capital lease is sometimes referred to as a double-net lease because the lessor receives payment after expenses are paid. ---> when this type of lease is used in real estate, it may be referred to as a triple-net lease because the lessee agrees to make the payments for taxes, insurance premiums and utilities. - capital leases must be capitalized, on the balance sheet.

major provisions of preferred stock issues

they have priority claim on both earnings and assets before the common stockholders but after debt holders. - Always has par value ---> Dividend is percentage of par value ---> Must be paid given sufficient earnings - most preferred stock accumulates dividends in arrears. - many preferred stock issued have a provision that grants voting rights, and/or the right to elect a representative to the board of directors, if a specified sequence of dividends is missed. - some preferred stock issues may be convertible into either common stock or debt under certain conditions.

EPC (external processing code)

this is a single-digit optional field for special purposes, such as image processing codes, located to the immediate left of the routing number.

performance measurement and reporting

this is an important part of the policy, especially when investments, derivatives, or trading activities are involved. - the metrics or benchmarks used for performance measurement should be defined clearly, as well as the expectations for meeting the performance objectives. - any required reports should be discussed, including formats, timeframes, and deadlines.

declaration date

this is the date when the board of directors announces or declares the dividend.

payment date

this is the date when the dividend is paid, which is usually a week or more after the record date, to allow the firm time to process and disburse the dividend.

ex-dividend date

this is the first date on which the stock is sold without entitlement to the upcoming dividend. - usually two business days prior to the shareholder-of-record date, thereby enabling brokerage firms to send an updated list of shareholders to a company on time.

ratio of fixed-rate investments to floating-rate investments

this relation is usually expressed in terms of a target fixed/floating ratio. - in general, the ratio of fixed-rate to floating-rate investments tends to correspond to management's views on long-term interest rate. - if interest rates are expected to rise, then it would be optimal to hold more floating-rate than fixed-rate investments in the portfolio. - floating-rate bond prices are less sensitive to interest rate changes, as the durations for floating-rate bonds are shorter than for fixed-rate bonds with the same maturity.

basic guidelines

this section should provide a listing of all the areas covered by the policy, along with procedures for how each of the related processes should be performed and managed. - these guidelines should include how to manage exceptions (i.e., what constitutes an exception and how to handle it)

hostile takeover

this usually occurs when the target is expected to fight the acquisition attempt. - in this case, the acquirer will normally make a tender offer directly to the target firm's shareholders, bypassing management. ---> a tender offer represents a cash offer for common shares. - a second approach is to engage in a proxy fight prior to the target's annual shareholders meeting. ---> if the acquiring firm can obtain enough of the proxies, then it can elect a new board of directors that, presumably, will approve the acquisition. - another approach is known as a creeping tender offer, which involves quietly purchasing sufficient stock on the open market to enable a change in the management. ---> regardless of the approach, the key similarity is that the existing board and management are resistant to the acquisition.

digital certificates

tie the identity of the user (private key) to the user's public key and may also authenticate the devices used to create documents or transactions. - the identification information is secured by a trusted third party's digital signature on the certificate. ---> the trusted third party is known as the certificate authority. - banks and other third parties are partnering with security companies, certificate authorities, software providers, and other technology firms to administer their public-key infrastructure and issue digital certificates. ---> these initiatives serve as virtual passports to subscribers.

"know your customer" (KYC) and statements of beneficial ownership

to prevent money laundering and other financial crimes many countries have significantly strengthened their requirements regarding corporate relationships with financial institutions and, in articular, the opening of accounts. ---> these activities go under the general title of KYC, which requires the FSP to perform varying amounts of due diligence to determine the legitimacy of any new customers, as well as the identities of the individuals who have access or control over the funds in those accounts.

accounting and G/L interfaces

transactions created by or imported to the TMS can normally be automatically posted to the G/L through the generation of dual and multisided entries from the combination of bank and internal transactions within the TMS, increasing the potential for straight-through processing. - some systems support the independent reconcilement of bank transactions to accounting entries. - bank transactions imported each day are matched against accounting entries imported from the G/L based on user-defined rules, for a true bank-to-book reconciliation.

economic development bonds

typically are issued by developing countries or sponsoring organizations, such as the World Bank or the International Monetary Fund (IMF), to foster development of infrastructure and related projects.

merchant card fees

typically charged as either bundled pricing or "interchange-plus" pricing. - bundled fees, the merchant is charged one fee by its card processor that covers all of the cost components of the transaction. ----> this is referred to as the merchant discount: it is typically subtracted directly from any card settlement. (merchant discount will be greater than card interchange) ---> bundled fees are often quoted high to cover any potential changes in interchange. - in interchange-plus pricing: the merchant pays the actual amount of any interchange and assessment fees, plus a stated fee to the card processor. ---> this fee can either be a fixed amount per transaction or a percentage of the value of the transactions. - smaller merchants or companies with small card volumes tend to pay higher fees.

dividend policy

typically set by the CEO of board of directors, often with input from the treasurer. - can have a significant impact on treasury operations due to the accompanying impact on cash flows and capital structure. - capital structure: ---> steadily increasing dividends may make a firm's common stock more attractive to certain institutional investors and may increase the stock price. ---> However, increasing dividends reduces the amount of cash flow available for reinvestment. This may slow growth and, hence, capital appreciation. - optimal policy: ---> maximizes shareholder value ---> allows for the sufficient retention of funds for future asset expansion ---> provides information to investors about the future earnings of the firm, which is commonly referred to as dividend signaling.

debentures

unsecured bonds that represent general claims against the issuer's assets and/or cash flows, and may have a higher interest rate than secured bonds. - may be issued on a subordinated basis, indicating that the claim on assets is subordinate to designated notes payable, bank loans, or other specified debt.

mortgage bonds

used to finance specific assets, such as real estate. - usually include substantial financial covenants or indenture agreements.

Trading companies

used when an exporter sells products at a discount to an export trading company, which then resells the products internationally. - in some cases, a global parent company will create a trading company entity that purchases products and then resells to subsidiaries of the company.

convertibles

usually bonds or preferred stock that may be exchangeable for common stock at the holder's or issuer's option under certain terms and conditions, and at a pre-stated price. - the conversion does not provide any new capital for the issuer. - the conversion ratio states the number of stock shares that one bond may be converted to if the owner chooses. - the maturity value of the bond and the conversion ratio determine the issue's conversion price. - most convertibles contain clauses that protect against dilution of value due to stock splits, stock dividends, or reduced stock prices.

ghost cards or virtual cards

variations on the p-card that do not involve the use of an actual card. - with these, a card number is given to a specific vendor and is then used for electronic purchasing and billing purposes.

WACC =

wDrD(1 - T) + wErE - wD = weighting of debt financing - T = firm's marginal income tax rate

duration

weighted average time to maturity - Approximate % change in bond price = −Duration x (Δ rate)

managerial flexibility (IPO disadvantage)

when a firm's stock is held closely, the owners have greater flexibility.

guarantee

when a subsidiary of a larger company borrows funds or issues bonds, lenders may require that another party guarantee the loan (the guaranteeing party). - Full Guarantee: the guaranteeing party fully guarantees any borrowing arrangement by the subsidiary and agrees to take over the loan if the subsidiary fails to make timely payments. - Specific-Project Guarantee: the guaranteeing party guarantees only loans relating to specific projects of the subsidiary, rather than all loans. - Guarantee of Payment of Collection: the guaranteeing party guarantees to make payment on the loan or collect payment from the subsidiary, but only if the subsidiary formally defaults on the loan. this agreement usually requires the lender to initiate default proceeding on the subsidiary and initiate collection efforts before the guaranteeing party becomes involved. - Performance Guarantees: in some cases, the lender may ask for specific performance guarantees relative to the assets being financed. Under a full guarantee, the parent fully guarantees performance by the subsidiary. Under a best-efforts guarantee, the parent agrees to use its best efforts to persuade the subsidiary to perform, but it does not guarantee subsidiary performance. - Personal Guarantee: in some cases, especially for smaller, privately held companies, the lender may require a personal guarantee on the part of the owner or other principals in the business before granting a loan. - Comfort Letter: while not technically a guarantee, this is a letter from another party stating actions that it will or will not take on behalf of the borrower. this type of agreement is not legally enforceable.

foreign-currency denominated bonds

when investing in foreign-currency-denominated bonds, the investment manager must consider the impact of fluctuating exchange rates on the value of the bond portfolio. - this means that in addition to default and interest rate risks, foreign exchange volatility must also be considered.

credit enhancements

with these, the lender is provided with reassurance that the borrower will honor the obligation through additional collateral, insurance, or a third-party guarantee. - reduced credit/default risk of a debt, thereby increasing the overall credit rating and lowering interest rates. - most common form is a guarantee