AFP Pre-Test

When using an external asset manager for managing investments, who is usually responsible by policy of investment execution and reporting? 1. External Reporting 2. External asset manager 3. Controller 4. Treasury personnel

4. Treasury personnel Policies and procedures should define the role of key personnel in the treasury organization, specifically identifying responsibilities and authority for each position and function. For example, the treasurer of an organization might be required to approve the hiring of an investment manager for the organization's short-term portfolio, but the assistant treasurer might be responsible for the day-to-day oversight of the investment manager. Note that roles and responsibilities should always be reviewed when there is a change in personnel within the treasury organization: a new team member may not have the same level of expertise as the previous officeholder, so responsibilities may need to be adjusted to reflect that. Without further understanding of the skill set of the individuals on a treasury team, the best answer is treasury personnel. Please refer to Chapter 18 topic 2 for more information on this topic. Question ID: CTP-PRE18.2-095

How are the percentages in receivables balance patterns established? 1. Using a distribution forecast 2. Using a cash conversion efficiency analysis 3. Using cash forecasting 4. Using a company's collection history

4. Using a company's collection history An A/R balance pattern is used to monitor customer payment timing. An A/R balance pattern specifies the percentage of credit sales during a time period (e.g., one month) that remain outstanding at the end of the current and each subsequent time period. A firm's collection history determines the normal balance pattern. Please refer to Chapter 11 topic 5 for more information on this topic. Question ID: CTP-PRE11.5-053

What do factors and insurance companies have in common? 1. Both are nonbank financial institutions 2. Both are primary participants in money market mutual funds (MMMFs) 3. Both are federally or state chartered as commercial banks in the United States 4. Both allow extending credit to customers without putting a firm directly at risk

1. Both are nonbank financial institutions Companies also obtain financial services from a range of nonbank financial institutions (NBFIs), which generally focus on specific markets. Nonbank financial institutions are sometimes collectively referred to as constituting a "shadow banking" system. Many of the services they provide are similar to those offered by the different types of banks outlined above. Factors and invoice discounters are entities that provide short-term financing to companies by purchasing accounts receivable at a discount. Insurance companies are considered NBFIs as they are institutional investors and risk management partners. Please refer to Chapter 3 topic 2 for more information on this topic. Question ID: CTP-PRE03.2-013

Which of the following statements is true about factoring? 1. Factors specialize in financing and managing receivables 2. The factor has recourse to the seller in most cases 3. The seller's customers are usually not aware that the transaction has occurred 4. Sellers receive a loan from a factor, which is repaid directly as receivables are collected

1. Factors specialize in financing and managing receivables Factoring involves the outright sale of receivables to a factor, a firm that specializes in the financing and management of receivables. In most factoring arrangements, the buyer of the receivables has no recourse to the seller. No recourse or without recourse means that the factor must absorb the loss if a customer fails to pay. In some cases, however, the factoring arrangement stipulates that the factor has recourse, in which case the seller is liable for any bad debts the factor cannot collect. Most factoring is performed on a notification basis, meaning the seller must notify customers that the account has been sold because payment is remitted directly to the factor. Please refer to Chapter 10 topic 6 for more information on this topic. Question ID: CTP-PRE10.6-048

All of the following are debt contract provisions EXCEPT __________. 1. Covenants 2. Parent corporation comfort letters 3. Representations and warranties 4. Terms by which the company will provide funds for redemption

2. Parent corporation comfort letters Bonds represent a contract between the issuing entity and the bondholders. This contract is known as a bond indenture. This contract: Describes the bond issue Lists collateral, when applicable Makes representations and warranties Specifies covenants States the terms by which the company will provide funds for redemption Sets forth the schedule of interest payment dates and amounts, the scheduled maturity date, and any early redemption or call provisions A comfort letter written by a parent corporation is a secondary document which provides additional protection (or assurance) to the bond purchaser. Please refer to Chapter 6 topic 3 for more information on this topic. Question ID: CTP-PRE06.3-024

Which of the following is true of physical pooling? 1. Physical pooling uses balancing entries on a set of virtual accounts 2. Physical pooling can use inexpensive internal-only loan pricing 3. Physical pooling usually requires the use of a single currency 4. Physical pooling requires all accounts belong to one legal entity

3. Physical pooling usually requires the use of a single currency In physical pooling, funds in separate subaccounts are automatically 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. Physical pooling can be used across multiple legal entities located in the same or different countries, but the funds must usually be in the same currency and all accounts must be with the same bank. Please refer to Chapter 12 topic 4 for more information on this topic. Question ID: CTP-PRE12.4-066

Which treasury management system (TMS) technology platform offers close integration with the organization's other financial applications as a major benefit? 1. Hosted solution 2. Client/Server 3. Enterprise resource planning (ERP) 4. Stand-alone

3. Enterprise resource planning (ERP) 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 ERP systems is that they 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 ERP systems include a treasury module, which may include the ability to directly connect to an organization's banks to initiate payments and other transactions from accounts payable (A/P) and accounts receivable (A/R), and to download and reconcile bank account information. Please refer to Chapter 15 topic 2 for more information on this topic. Question ID: CTP-PRE15.2-079

Place the following credit card payment clearing process steps in order from first to last: I. Hold placed on credit limit II. Credit card presented to merchant for purchase III. Authorization granted IV. Charges sent for clearing by merchant/transaction data routed to issuing bankV. Authorization request VI. Hold converted to charge/funds remitted through network to merchant 1. II, I, V, III, VI, IV 2. II, I, V, IV, III, VI 3. II, V, I, IV, VI, III 4. II, V, I, III, IV, VI

4. II, V, I, III, IV, VI The credit card transaction process steps are as follows: AUTHORIZATION PROCESS Step 1-A) credit card presented to merchant for purchase Step 1-B) authorization request Step 1-C) hold placed on credit limit Step 1-D) authorization granted CLEARING PROCESS Step 2-A) charges sent for clearing by merchant Step 2-B) transaction data routed to issuing bank Step 2-C) hold converted to charge SETTLEMENT PROCESS Step 3) funds remitted through network to merchant Please refer to Chapter 4 topic 4 for more information on this topic. Question ID: CTP-PRE04.4-016

Which of the following is the most common method for making consumer-to-business (C2B) payments other than at the point of sale in most developed countries? 1. Electronic payments 2. Cash payments 3. Check payments 4. Virtual or Cryptocurrencies

1. Electronic payments Consumer to Business (C2B) 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 C2B payments are either card payments at the point of sale or electronic payments made through a bank. Virtual currencies, or cryptocurrencies (e.g., Bitcoin), are in the early stages of development and have gained limited acceptance, at least in part because, unlike traditional currencies, virtual currencies are not seen as stable stores of value. Please refer to Chapter 4 topic 3 for more information on this topic. Question ID: CTP-PRE04.3-014

In the United States, the recording of a company's assets, liabilities, revenues and expenses is conducted in accordance with which of the following sets of rules? 1. American National Standards Institute (ANSI) 2. Generally Accepted Accounting Principles (GAAP) 3. Generally Accepted Auditing Standards (GAAS) 4. Uniform Commercial Code (UCC)

2. Generally Accepted Accounting Principles (GAAP) US accounting practices are governed by a detailed set of rules referred to as US Generally Accepted Accounting Principles, or US GAAP. This set of accounting standards is developed by the Financial Accounting Standards Board (FASB), an independent, self-regulating organization formed in 1973. US GAAP is published in the form of Accounting Standards Codification(ASC) Topics. Please refer to Chapter 8 topic 3 for more information on this topic. Question ID: CTP-PRE08.3-037

Which of the following information security elements is especially important because it ensures that a financial transaction was not modified in transit? 1. Authentication 2. Integrity 3. Authorization 4. Non-Repudiation

2. Integrity Integrity is the ability to ensure that a message was not modified in transit and that stored information has not been improperly modified or deleted. Data integrity is especially important for financial transactions. Please refer to Chapter 15 topic 2 for more information on this topic. Question ID: CTP-PRE15.2-080

After December 15, 2018, which type of U.S. publicly traded firm is most likely to benefit from off-balance-sheet financing using operating leases with terms of six months? 1. A firm with restrictive covenants on the use of additional debt 2. A firm with low debt levels 3. None since U.S. publicly traded firms need to capitalize this type of operating lease on the balance sheet after that date 4. A firm with a high percentage of equity

1. A firm with restrictive covenants on the use of additional debt 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 restrictive covenants on the use of additional debt. Despite the historical popularity of operating leases as a form of off-balance-sheet financing, changes are on the horizon. In February 2016, the US-based Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that requires operating leases with terms of more than 12 months to be capitalized on the balance sheet. For publicly traded US firms (or firms in other countries that follow FASB guidance), this change will take effect after December 15, 2018. The coming changes to the US accounting standards would not impact operating leases with 6 month terms. Therefore US companies would still benefit from this type of short term financing that does not appear on the Balance Sheet. Please refer to Chapter 6 topic 3 for more information on this topic. Question ID: CTP-PRE06.3-027

Payment float from the perspective of the buyer/payor encompasses which of the following? 1. Accounts payable and disbursement float 2. Collection float 3. Accounts receivable, mail delay, processing delay, and clearing delay 4. Invoicing float

1. Accounts payable and disbursement float Different float terms may refer to the same or similar time intervals, but specific usage varies, depending upon whether the time period is viewed from the perspective of the seller/payee or the buyer/payor. From the buyer/payor's perspective (procure-to-pay), payment float (including mail, processing, and clearing float, as well as any invoice processing time and credit terms) represents the delay between the time an invoice is received (Accounts Payable) and the time the buyer/ payor's account is debited (Disbursement float.) Please refer to Chapter 10 topic 2 and Exhibit 10.3 for more information on this topic. Question ID: CTP-PRE10.2-044

A letter of credit (L/C) transfers payment risk to the which of the following parties? 1. The issuing bank 2. The buyer 3. The seller 4. The seller's bank

1. The issuing bank An L/C is 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. The L/C substitutes a bank's credit for that of the buyer, virtually eliminating the credit risk to the seller. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-063

Which of the following correctly states an excluded item in calculating the quick ratio and reason for the exclusion? 1. Work-in-process inventory (but includes other types of inventory); because WIP inventory requires estimates that could be distorted 2. All inventory; because it is a low liquidity current asset 3. Accounts receivable; because these payments are an extra step away from becoming cash 4. Short-term investments; because there could be a delay in converting them to cash

2. All inventory; because it is a low liquidity current asset The quick ratio (also known as the acid test ratio) is defined as the sum of cash, short-term investments, and accounts receivable, divided by total current liabilities. The quick ratio is a more stringent measure of liquidity than the current ratio, as it excludes inventory due to its lower liquidity. The quick ratio also excludes prepaid expenses, which have little to no likelihood of converting to cash. Please refer to Chapter 11 topic 2 for more information on this topic. Question ID: CTP-PRE11.2-051

An organization is facing bankruptcy and management feels that the firm's assets will be more valuable to shareholders in a reorganization than if it liquidates. If management has a strong vision of how to accomplish this reorganization successfully, which of the following would be the BEST method to attempt filing for bankruptcy? 1. Chapter 11 (cram-down procedure) 2. Chapter 11 (unanimous consent procedure) 3. Chapter 7 (pre-packaged) 4. Chapter 7 (pre-arranged)

2. Chapter 11 (unanimous consent procedure) Under the unanimous consent procedure of a Chapter 11 reorganization, all classes of creditors and equity holders must consent to the reorganization plan, with a two-thirds vote of all members in each class required for consent. The assumption under this plan is that the firm's assets will have a higher value if it reorganizes and continues operating than if it liquidates. Management is in a strong bargaining position in the negotiations over the reorganization plan because only management can propose a plan during the first four months of the filing, and extensions of this timeframe are often granted in this process. Only after all parties have voted on management's initial plan, which may take another two months, can other parties propose alternative plans. Managers can threaten to transfer the firm's bankruptcy filing from Chapter 11 to Chapter 7 if creditors do not agree to the plan. Please refer to Chapter 2 topic 6 for more information on this topic. Question ID: CTP-PRE02.6-011

Which of the following lists the components of collection float in the order that they occur? I. Mail float II. Availability float III. Clearing float IV. Processing float 1. I, IV, II and III 2. I, IV and II only 3. II, I, IV and III 4. I, III and II only

2. I, IV and II only Collection float consists of mail float, processing float and availability float. Clearing float is a component of disbursement float. Please refer to Chapter 10 topic 2 and Exhibit 10.3 for more information on this topic. Question ID: CTP-PRE10.2-045

Since the Sarbanes-Oxley Act of 2002, which of the following has assumed the responsibility for approving the accuracy of all financial statements of a publicly traded company listed on a U.S. stock exchange? 1. The Board of Directors 2. The Chief Financial Officer (CFO) 3. The Controller 4. The Treasurer

2. The Chief Financial Officer (CFO) The United States (U.S.) Sarbanes-Oxley Act of 2002 (SOX) makes the CFO of publicly traded companies listed on US stock exchanges personally responsible for the accuracy and completeness of financial statements, and for the development and implementation of adequate internal financial controls. Please refer to Chapter 1 topic 3 for more information on this topic. Question ID: CTP-PRE01.3-003

All of the following are typical covenants outlined within a bond indenture EXCEPT ___________. 1. The use of junior debt instruments 2. The schedule for interest payments 3. Reporting requirements 4. Prepayment terms

2. The schedule for interest payments Typical bond covenants cover the following topical areas: 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 schedule of interest payments would be laid out in the bond indenture contract. Please refer to Chapter 6 topic 3 for more information on this topic. Question ID: CTP-PRE06.3-023

The all-in rate consists of a base rate. Which of the following can this base rate be? I. London Interbank Offered Rate (LIBOR) II. Prime rate III. Fed funds rate IV. Eurobond rate 1. I, II and III only 2. I, III and IV only 3. I and II only 4. I, II, III and IV

1. I, II and III only 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. Historically, LIBOR has been the most important base interest rate, with the Fed funds rate and the US prime rate also being important benchmark rates in the United States. Please refer to Chapter 13 topic 4 for more information on this topic. Question ID: CTP-PRE13.4-070

What is the term that describes the transmission of a file of items presented for payment by the payor bank to the issuing company? 1. Reverse positive pay 2. Payor bank services 3. Positive pay 4. Full reconciliation

1. Reverse positive pay Reverse positive pay is 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. Please refer to Chapter 12 topic 2 for more information on this topic. Question ID: CTP-PRE12.2-054

Which of the following investments is generally considered to be risk-free? 1. U.S. Treasury notes 2. Money market mutual funds 3. Negotiable Certificates of Deposit (CDs) 4. Municipal bonds

1. U.S. Treasury notes U.S. Treasury issues include T-bills, notes and bonds. Due to a perception of low liquidity risk and low default risk, US treasuries are generally considered risk-free and serve as the benchmark against which interest rates on other debt securities are compared. However, not all government paper is considered risk-free, as sovereign risk does vary among governments of different countries and a number of governments have defaulted on their sovereign debt over the years. Municipal bonds, Negotiable CD's, and money market mutual funds are riskier than US treasury notes, and will generally yield a higher interest rate. Please refer to Chapter 5 topic 3 for more information on this topic. Question ID: CTP-PRE05.3-020

The internal auditor typically reports directly to the _____________. 1. Chief Executive Officer (CEO) 2. Treasurer 3. Chief Financial Officer (CFO) 4. Board of Directors

4. Board of Directors The internal auditor manages the internal audit function to ensure that controls and operating procedures are established to protect the company from losses caused by inefficiency, inaccuracy, or fraud. The internal auditor reports directly to the board of directors to assure the auditor's independence and objectivity. Please refer to Chapter 1 topic 3 for more information on this topic. Question ID: CTP-PRE01.3-004

A cash manager must decide whether to pay a $100,000 invoice on the 10th day after it is due and receive a 2% discount or to forgo the discount and pay the invoice on the 40th day after it is due and in the interim use the funds for a short-term investment. Approximately what yield must be generated on the short-term investment to make it profitable not to take the discount? (Rounded to the nearest whole percent) 1. 25% 2. 19% 3. 12% 4. 6%

1. 25% The discount code is determined by using the following equation: Discount Code = (D ÷ (100 - D)) * (365 ÷ (N - T)) Where: D = Discount Percentage N = Net Period T = Discount Period For this question, the calculation is as follows: Discount Code = (2 ÷ (100 - 2)) * (365 ÷ (40 - 10)) Discount Code = 25% Please refer to Chapter 11 topic 4 for more information on this topic. Question ID: CTP-PRE11.4-052

A manufacturer has $10,000 in fixed costs for a month and can sell its product for $100 per unit. Each unit has $60 in variable costs. What is this manufacturer's break-even point in units? (Rounded to the nearest whole unit) 1. 250 units 2. 400 units 3. 167 units 4. 100 units

1. 250 units Break-even analysis involves calculating the level of sales required to earn an operating profit of $0. This quantity is referred to as the break-even quantity. The break-even quantity can be calculated using estimates of the fixed costs, the per-unit sales price, and the variable cost per unit. This manufacturer's break-even point is calculated as follows: Unit Break-Even Point = Fixed Costs ÷ (Selling Price Per Unit - Variable Cost Per Unit) Unit Break-Even Point = $10,000 ÷ ($100 per unit - $60 per unit) = 250 Units Please refer to Chapter 9 topic 5 for more information on this topic. Question ID: CTP-PRE09.5-043

An organization determines that its capital market investment objective is to produce an absolute annualized return of 2.5%. What is the starting point for setting this or any other similar type of objective? 1. Analysis of investor's risk tolerance 2. Analysis of relative basis or benchmark to use for returns 3. Analysis of a general goal such as capital appreciation 4. Analysis of the types of return required by the investor

1. Analysis of investor's risk tolerance 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 (e.g., an annualized return of 2.5%) A general goal, such as current income, capital appreciation, capital preservation or total return, or A relative benchmark return, such as exceeding the return on 10-year U.S. Treasuries by 50 basis points Please refer to Chapter 19 topic 3 for more information on this topic. Question ID: CTP-PRE19.3-100

All of the following are true of bond ratings EXCEPT __________. 1. Analysts use a precise mathematical formula to determine a bond's rating 2. Government entities with downgraded bonds have a more difficult time raising additional capital in the market 3. Rating agencies may downgrade an issue based on changes in the general economic environment 4. A company's bond ratings have a direct impact on the company's cost of capital

1. Analysts use a precise mathematical formula to determine a bond's rating Ratings are based on both qualitative and quantitative factors but they are fundamentally the view of the credit agency and its analysts. Given the complexity of most large firms, there is no precise mathematical formula that analysts can use to determine the rating; instead, many factors must be taken into account. A firm's bond rating is considered a direct measure of the risk of the related securities and impacts the overall cost of capital. Rating agencies periodically review outstanding debt and may upgrade or downgrade an issue or change the rating outlook based on changes in either the issuer or the general economic environment. Companies or government entities with downgraded ratings have a more difficult time raising additional capital in the market and will pay a higher interest rate on future bonds issued. Please refer to Chapter 6 topic 3 for more information on this topic. Question ID: CTP-PRE06.3-029

Which of the following yield quoting conventions is compounded on the basis of a 365-day year? 1. Bond equivalent yield 2. Money market yield 3. Holding period yield 4. After-tax yield

1. Bond equivalent yield Money market yield is based on a 360-day year while bond equivalent yield is based on a 365-day year. The specific formulas are shown below: Money Market Yield (MMY) = ((Cash Received at Maturity - Amount Invested) ÷ Amount Invested) * (360 ÷ Days to Maturity) Bond Equivalent Yield (BEY) = ((Cash Received at Maturity - Amount Invested) ÷ Amount Invested) * (365 ÷ Days to Maturity) A holding period yield is the yield computed for the time a security is held. However, yields are quoted on an annualized basis, so the holding period yield is adjusted by determining how many holding periods occur in one year and using that number to annualize the yield. The After-Tax yield is a calculation used to compare tax free vs. taxable yields. Please refer to Chapter 13 topic 3 for more information on this topic. Question ID: CTP-PRE13.3-069

A multinational company that uses regional treasury centers would best be described as using which of the following types of international treasury management organization? 1. Combined 2 Decentralized 3. Centralized 4. Segmented

1. Combined A company that has multiple legal entities, geographically dispersed sales offices (e.g., a multinational company), and/or limited personnel may centralize its treasury functions at the company's headquarters. A centralized treasury offers the advantages of stronger control, economies of scale, and lower aggregate operating costs. A decentralized treasury structure may be used by companies with autonomous subsidiaries and/or multiple operational entities (e.g., manufacturing, distribution, marketing, sales, and finance). Some large multinational corporations operate regional treasury centers that combine aspects of centralized and decentralized systems (i.e., while each region is centralized, overall treasury operations are decentralized to the regional centers). These regional centers provide treasury services to specific subsidiaries within a designated geographic area (e.g., North America, Europe, Asia-Pacific, the Middle East, Africa, or Latin America). Few companies operate a fully decentralized treasury. From the perspective of treasury, this typically means the treasury policy is set centrally. The extent to which operational treasury activity is then centralized varies according to a variety of factors, including corporate culture and the geographic footprint of the organization itself. Please refer to Chapter 1 topic 3 for more information on this topic. Question ID: CTP-PRE01.3-005

Which of the following would help a treasurer sort through the vast data from a treasury management system (TMS), starting at a high level and showing just the information relevant to the treasurer's duties? 1. Dashboard 2. Key performance indicator (KPI) 3. PowerPoint presentation 4. Exception reporting

1. Dashboard A dashboard is 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 (e.g., green is normal and red requires immediate attention). Dashboards 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. KPIs will generally be included on a dashboard. PowerPoint presentations are manual to create, and would typically facilitate the ability to drill down into any information. An exception report would only contain unfavorable metrics. A dashboard will contain favorable and unfavorable metrics. Please refer to Chapter 15 topic 2 for more information on this topic. Question ID: CTP-PRE15.2-082

The ledger cutoff on an availability schedule is the time by which _____________. 1. Deposits must be received to be posted to the ledger balance of the depositor's account 2. The originating institution must receive an electronic small-value transmission to the ledger balance to ensure timely payment 3. A wire transfer must be received to ensure availability of collected funds to the ledger balance 4. Checks may be presented for payment to the ledger balance by the Fed

1. Deposits must be received to be posted to the ledger balance of the depositor's account There are two check deposit-related deadlines established by banks that determine when funds become available: the ledger cutoff time and the deposit deadline. A bank's ledger cutoff is 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 the ledger cutoff time are considered to be received by the bank on the following banking day. For example, if a bank has a published ledger cutoff time of 3:00 p.m., then a deposit made at 2:00 p.m. Friday will be credited to the ledger balance on Friday. However, a deposit made to the same bank account on Friday at 3:30 p.m. would not be credited to the ledger balance until Monday, which is the next banking business day. Please refer to Chapter 4 topic 4 for more information on this topic. Question ID: CTP-PRE04.4-017

A banker's acceptance (BA) is created when a bank accepts payment responsibility for which of the following? 1. Draft 2. Commercial paper (CP) 3. Trade credit 4. Repurchase agreement

1. Draft A BA can be used to finance the import, export, or domestic shipment of goods, as well as the storage of properly titled goods. BAs are used frequently in conjunction with L/Cs requiring a time draft drawn on a bank. A BA is created when one company signs an unconditional written order directing a bank to pay a certain sum of money on demand or at a definite time to another company, 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 (i.e., the issuer that drew the draft) fails to make payment. Since the accepting bank assumes the risk of the buyer defaulting, it makes it easier for the buyer or seller to undertake international trade. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-065

The Committee on the Global Financial System (CGFS) of the Bank for International Settlements (BIS) places special emphasis on which of the following? 1. Helping central bank governors to respond to global financial market threats 2. Helping govern the Basel Committee by serving as its secretariat 3. Helping central banks to analyze developments in international settlement and clearing systems 4. Helping central banks to develop cross-border and multicurrency settlement schemes

1. Helping central bank governors to respond to global financial market threats The Committee on the Global Financial System is a central bank forum for the monitoring and examination of broad issues relating to financial markets and systems. The CGFS helps to elaborate appropriate policy recommendations to support the central banks in the fulfillment of their responsibilities for monetary and financial stability. In carrying out this task, the Committee places particular emphasis on assisting central bank Governors in recognizing, analyzing, and responding to threats to the stability of financial markets and the global financial system. Please refer to Chapter 2 topic 3 for more information on this topic. Question ID: CTP-PRE02.3-008

Match the income term below to it's description or common usage. Income Term: I. Earnings before interest, taxes, depreciation, and amortization (EBITDA)II. Earnings before interest and taxes (EBIT)III. Income before taxes Description: A. Operating income, adjusted for other income and expenses, such as interest income or currency lossesB. Indicates the ability of a company to service debt; popular in industries with expensive assets that have long amortization periodsC. Traditionally measures a firm's ability to generate operating profits and meet its financial and tax obligations 1. I: B, II: C, III: A 2. I: C, II: B, III: A 3. I: A, II: B, III: C 4. I: B, II: A, III: C

1. I: B, II: C, III: A After COGS, operating expenses, and depreciation and amortization are subtracted from revenue, the remaining amount is referred to as earnings before interest and taxes (EBIT), also referred to as operating income. EBIT is traditionally used to evaluate a firm's ability to generate operating profits and to meet its financial and tax obligations. EBITDA adds non-cash expenses (depreciation and amortization) back to EBIT to produce a measure that more accurately reflects the cash operating profit and it is commonly used as a proxy for cash flow. EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods. Income before taxes (also called net profit before taxes) is calculated as operating income adjusted for other income and expenses. Net income is income before taxes minus income tax expense. Please refer to Chapter 8 topic 4 for more information on this topic. Question ID: CTP-PRE08.4-039

All of the following are important considerations in determining the number of banks a company should have in its banking network EXCEPT ___________. 1. Importance of diversification of funds 2. Risk of having a "single point of failure" 3. Cost to maintain each bank relationship 4. Existence of multi-country operations

1. Importance of diversification of funds The treasurer generally determines the appropriate number of banking relationships that are required given the firm's unique operating and financial characteristics. Specific determinants include the organization's credit needs, 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. Please refer to Chapter 7 topic 2 for more information on this topic. Question ID: CTP-PRE07.2-031

From time to time the Treasury department may be called upon to participate in road shows for what purpose? 1. Investor relations 2. Portfolio review 3. Conducting an IPO 4. Disbursing bondholder payments

1. Investor relations Road shows are presentations to potential investors to raise capital. In addition to its trustee and disbursing responsibilities, the treasury department may be involved with investor relations, including such responsibilities as: Participating in road shows Maintaining shareholder lists Sending out financial statements, annual reports, and other required filings Communicating with shareholders and bondholders Addressing investors' questions Please refer to Chapter 20 topic 4 for more information on this topic. Question ID: CTP-PRE20.4-104

A U.S. based investor purchases asset-backed commercial paper (ABCP) denominated in euros. Which is true of this investment? 1. It has liquidity and foreign exchange risk 2. It has credit but not price risk 3. It typically has a maturity of greater than 45 days 4. It is interest bearing

1. It has liquidity and foreign exchange risk ABCP typically has a maturity of less than 45 days, is issued by companies and financial institutions, has a fixed interest rate and has credit, liquidity, price and foreign exchange risk (because in this scenario it is issued in a currency other than the currency of the investor). Please refer to Chapter 5 topic 3 for more information on this topic. Question ID: CTP-PRE05.3-019

In a multinational company that uses netting, when a subsidiary country's currency is expected to depreciate relative to the parent company's currency, which of the following could be done to shift liquidity in the most advantageous manner? 1. Leading 2. Notional pooling 3. Reinvoicing 4. Lagging

1. Leading Netting is a type of payables system that reduces the number of cross-border payments among the firm's units through the elimination or consolidation of funds denominated in different currencies. Netting systems may be used to lead and lag payments. Leading and lagging involve executing cross-border payments between subsidiaries before the scheduled payment date (leading) or after the scheduled payment date (lagging). In both leading and lagging, liquidity is shifted from one subsidiary to another. Leading is employed when a subsidiary country's currency is expected to depreciate relative to the parent's currency. Lagging is used when a subsidiary's currency is expected to appreciate relative to the parent's currency. Please refer to Chapter 10 topic 9 for more information on this topic. Question ID: CTP-PRE10.9-050

Which is the likely view of an organization on future long-term interest rates if it has more floating-rate investments than fixed rate investments? 1. Long-term interest rates are going to rise 2. Long-term interest rates will stay on par 3. The organization's use of fixed versus floating rates is unrelated to long-term interest rates 4. Long-term interest rates are going to fall

1. Long-term interest rates are going to rise In addition to using interest rate risk, many fixed-income portfolio managers also use the ratio of fixed-rate obligations to floating-rate obligations to monitor their portfolios. 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 rates. If interest rates are expected to rise, then it would be optimal to hold more floating-rate than fixed-rate investments in the portfolio. There are two reasons that a firm will benefit from holding more floating-rate bonds in a rising interest rate environment. First, coupon payments received from the investment will increase as rates rise. Second, 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. Therefore, if interest rates increase, the price of a floating-rate bond will have a smaller decrease than the price of a fixed-rate bond. Alternatively, if rates are expected to drop, then fixed-rate obligations should be locked in. Please refer to Chapter 19 topic 3 for more information on this topic. Question ID: CTP-PRE19.3-101

What is an important concept in the audit process that allows for a significant degree of judgment in the preparation of the accounts? 1. Materiality 2. Opinion type 3. Substance over form 4. Comparability

1. Materiality It is important to understand the concept of materiality as it relates to the audit process. In most accounting applications, there is usually a significant degree of judgment involved in the preparation of the accounts (e.g., the judgment required in determining bad debt estimates). Under the International Standards on Auditing (ISA), materiality is explained (although not explicitly defined) as misstatements (including omissions) that would influence the decision made by readers of a set of financial statements. Please refer to Chapter 8 topic 4 for more information on this topic. Question ID: CTP-PRE08.4-038

If the confirming bank in a letter of credit (L/C) commits to the exporter that payment will be made if documents meet the terms and conditions of the L/C, regardless of the issuing bank's ability to pay, what role does the confirming bank also take on? 1. Negotiating bank 2. Advising bank 3. No other role, this is the function of the confirming bank 4. Issuing bank

1. Negotiating bank An L/C is 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. A commercial or documentary L/C is issued by a bank as the intended mechanism of payment in relation to a trade transaction involving the domestic or international shipment of merchandise. A commercial L/C typically requires presentment of a draft, commercial invoice, and related shipping documents; hence, it is documentary in nature. Banks may serve a variety of roles in L/C transactions: The issuing bank is the importer's bank that issues the L/C in favor of the exporter. The advising bank advises the exporter of an L/C in its favor. Other banks that may be involved in the transaction are the negotiating bank and the confirming bank: The advising and negotiating banks are frequently the same bank, performing dual roles. The advising/negotiating bank examines the documents presented by the beneficiary (i.e., the exporter), receives payment from the issuing bank, and pays the beneficiary. If requested, the advising/negotiating bank may add confirmation, as the confirming bank, to an L/C. In doing so, the confirming bank commits to the exporter that payment will be made if documents meet the terms and conditions of the L/C, regardless of the issuing bank's ability to pay. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-056

In a project analysis, the cash manager conducts a what-if analysis of the best and worst possible net present values of the project. Which of the following is this manager using? 1. Scenario analysis 2. Profitability index 3. Simulation 4. Sensitivity analysis

1. Scenario analysis Scenario analysis involves changing multiple variables at a time. This allows the decision maker to perform a what-if analysis that assesses possible outcomes under a range of circumstances. Scenario analysis is frequently used to establish the lower bound (or worst-case scenario) and the upper bound (or best-case scenario). Sensitivity analysis determines the change in a financial asset value after varying the value of a particular input variable (e.g., recalculating a project's NPV after changing the value of the upfront cost). Simulation techniques combine aspects of scenario and sensitivity analyses. Specifically, simulations allow the decision maker to specify certain assumptions regarding the uncertain variables used in the analysis. Further, multiple variables are allowed to change at a time. Simulation models are complex and are usually calculated using software programs. Profitability Index is a capital budgeting metric. Please refer to Chapter 9 topic 3 for more information on this topic. Question ID: CTP-PRE09.3-041

What is the process of bundling common corporate assets, like accounts receivable or inventory, together to back the issue of debt instruments called? 1. Securitization 2. Project financing 3. Zero-Coupon Bond 4. Off-balance-sheet financing

1. Securitization Securitization. Debt instruments are commonly securitized to increase liquidity and to lower the yield paid by issuers. Common corporate assets used in securitization include accounts receivable and inventory. These assets can be bundled to collateralize securities, making them more liquid and attractive to investors. Project financing involves complex finance arrangements, sometimes involving several companies or sponsors forming a separate legal entity to operate the project. Off-balance-sheet financing are financing structures designed to not appear on the balance sheet. Examples of these kinds of structures include joint ventures, developmental partnerships, factoring and operating leases. Zero-coupon bonds do not pay interest and are therefore issued at a substantial discount below par value. Please refer to Chapter 6 topic 3 for more information on this topic. Question ID: CTP-PRE06.3-026

Which of the following statements is TRUE of the payback period calculation? 1. This method does not consider cashflows earned beyond the payback period 2. When calculating payback periods, funds received in the future are discounted to present value 3. Longer payback periods indicate a project is less risky as the positive cashflows are spread across a greater time horizon 4. Every project has a payback period that can be calculated and compared objectively against other projects

1. This method does not consider cashflows earned beyond the payback period The payback period is the number of years required to recover the project's initial cost. There is no specific criterion for an acceptable payback period; it may be arbitrarily set by management. A shorter payback period is preferred, as (1) funds recovered from the upfront cost can be more quickly reinvested in another project and (2) the riskiness of the project is lower. A Project's payback period can be unknown if the projected cash flows never exceed the upfront cost. The payback period method suffers from two shortcomings: It does not consider the time value of money It fails to consider cash flows beyond the payback period Please refer to Chapter 9 topic 3 for more information on this topic. Question ID: CTP-PRE09.3-042

When using the percentage-of sales method of cash forecasting, the projected ending cash balance is calculated by ________________. 1. Projecting the regular and one-time collections from customers and the cash disbursements for purchases and other cash outflows 2. Determining how the forecasted income statement and balance sheet values impact cash 3. interpreting the daily impact that a single event has on cash flows over a specified period. 4. Using in-sample validation to collect actual and forecasted values, which are adjusted by a weighting factor

2. Determining how the forecasted income statement and balance sheet values impact cash The percentage-of-sales method requires three steps: Forecast the income statement and balance sheet, projecting the income statement items as a percentage of sales. Likewise, certain items on the balance sheet, such as inventory, A/R, and A/P, are also projected as a percentage of sales. Calculate the projected ending cash balance by determining how the forecasted income statement and balance sheet values impact cash (i.e., utilize a cash flow statement given the impact of changes to investments, capital/depreciation and potential slowing of cash collections or payments). Compare the projected ending cash balance with the company's target cash balance and adjust the pro forma statement to show the source of funding for a cash shortfall or the investment of a cash surplus. Please refer to Chapter 14 topic 5 for more information on this topic. Question ID: CTP-PRE14.5-077

In conjunction with company policy, bank fees and short-term interest rates, what factor can be used to determine whether it is better to hold excess balances and reduce bank service charges or to maintain lower balances and increase short-term investments? 1. Reserve requirement 2. Earnings credit rate 3. Availability delay 4. Account maintenance fee

2. Earnings credit rate US banks typically provide their corporate customers with imputed interest on 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 bank selection process. ECR is typically tiered based on balances, with different ECRs applying as balances move above or below pre-agreed thresholds. 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. Please refer to Chapter 7 topic 2 for more information on this topic. Question ID: CTP-PRE07.2-034

Which of the following is a primary objective of treasury management? 1. Investment profit 2. Financing 3. Cost reduction 4. Receivables management

2. Financing The primary goal of treasury management is to effectively and efficiently manage an organization's cash and related financial assets to support the achievement of the organization's business objectives and strategy. This goal is critical because all firms, no matter how successful, have a finite and variable amount of liquid assets on hand during a given period of time. This primary goal of financing is achieved through the completion of several objectives. The objectives of treasury management include maintaining liquidity, optimizing cash resources, maintaining access to short-term financing, managing investments, maintaining access to medium- and long-term financing, managing risk, managing information and technology, collaborating with other departments and sharing financial information and managing external parties. Please refer to Chapter 1 topic 2 for more information on this topic. Question ID: CTP-PRE01.2-002

A company that is developing its risk management policy guidelines should do which of the following? I. Establish evaluated receipts settlement (ERS) II. Hedge interest rate risk with swaps III. Determine the acceptable levels of exposure in various financial risk areas IV. Determine appropriate methods for measuring exposure 1. I and II only 2. III and IV only 3. II, III and IV only 4. I, II and IV only

2. III and IV only 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 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 Please refer to Chapter 15 topic 2 for more information on this topic. Question ID: CTP-PRE16.2-084

A company that invests in floating rate assets but borrows long-term at fixed rates can benefit from which of the following derivatives? 1. Currency futures 2. Interest rate swaps 3. Interest rate caps 4. Currency swaps

2. Interest rate swaps A swap is an agreement between two parties to exchange (or swap) a set of cash flows at a future point in time. Interest rate swaps are the most common type of swap. They are very flexible hedging instruments used by treasury professionals for asset/liability management, as well as by bond portfolio managers to reduce or extend the average maturity or exposure of an open position. Interest rate swaps are most often used by treasury professionals to convert a fixed-rate investment or obligation into a floating-rate investment or obligation (or vice versa) in order to better match the particular needs of a company and the current offerings of the market. In this type of swap, Party X agrees to pay Party Y a stream of cash flows equal to a floating rate of interest on some mutually agreed-upon amount. This amount is referred to as notional principal because the principal amount does not exchange hands; instead, only interest payments are exchanged. At the same time, Party Y agrees to pay Party X a stream of cash flows equal to a fixed rate of interest on the same notional principal at the same future dates. In other words, Party X is swapping a fixed-rate loan for a floating-rate loan while Party Y is doing exactly the opposite. Interest rate swaps are used to manage sensitivity to changing interest rates, usually by using swaps to manage the proportion of fixed to floating-rate debt held by the company. Please refer to Chapter 17 topic 5 for more information on this topic. Question ID: CTP-PRE17.5-091

A coupon-bearing bond with a maturity of three years would be considered which of the following? 1. Long-term bond 2. Intermediate-term note 3. Term loan 4. Indexed bond

2. Intermediate-term note Companies or government entities issue medium- or intermediate-term notes with maturities ranging from two to ten years. In most cases, these notes pay interest at periodic intervals (e.g., semiannually) and are similar to long-term bonds except for the shorter maturity. A term loan has a fixed maturity (usually longer than one year) that can be repaid either in installments or in a single payment. Long-term bonds are typically issued with original maturities of 10 to 30 years. 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. Please refer to Chapter 6 topic 3 for more information on this topic. Question ID: CTP-PRE06.3-028

Which of the following is an advantage of using regression analysis in a distribution forecast? 1. It does not require large amounts of data 2. It can accurately predict changes in trend 3. It considers the historical relationship between sales and balance sheet items 4. It improves the accuracy of medium- to long-term forecasts

2. It can accurately predict changes in trend Correlation analysis involves identifying the degree of association between two variables. Understanding the variables that are strongly correlated with cash flow is important as these variables can be used to produce future cash forecasts. For example, there is usually a strong positive correlation between a firm's sales and its cash flows. Once a correlation or relationship between cash flow and another variable is established, then cash flow can be forecasted using the other variable. This would typically be accomplished with regression analysis. Regression analysis is a statistical method that can be used to assess the impact that a given independent variable or driver variable has on a dependent variable. To estimate the relationship using regression analysis, the user would need historical data values for the dependent and independent variable. That is, if sales rise, cash flow will rise in a predictable manner and if sales fall this change in trend will be accurately predicted. Please refer to Chapter 14 topic 5 for more information on this topic. Question ID: CTP-PRE14.5-078

Which of the following is the U.S. interpretation of a board of director's mandate to act in the best interest of shareholders? 1. Maximizing the company's stock price in the current period 2. Maximizing the company's stock price over the long term 3. Maximizing the company's net profits over the long term 4. Maximizing the company's net profits in the current period

2. Maximizing the company's stock price over the long term The board of directors has the responsibility to act in the best interest of shareholders. In the United States, this is generally interpreted as maximizing shareholder wealth or maximizing the company's stock price over the long term. Please refer to Chapter 1 topic 4 for more information on this topic. Question ID: CTP-PRE01.4-006

When talking about converting paper-based payments to electronic, the term float-neutral refers to which of the following? 1. Providing a one-time incentive to switch to electronic payments and no discount thereafter 2. Offering a discount that factors in the buyer's opportunity cost and timing difference between methods 3. Making the electronic payment date equal to the paper payment date plus average payment float 4. Eliminating all paper-based float delays for both collections and disbursements through strategic partnerships

2. Offering a discount that factors in the buyer's opportunity cost and timing difference between methods Efficiencies can usually be realized in the payment process by replacing paper document flows and payments with electronic methods. In these situations it is helpful to consider the payment terms that would make the buying firm indifferent between switching from check to electronic payments. Such payment terms (known as float-neutral terms) could involve adjusting the timing (i.e., value date) of the payment or negotiating a payment discount that would provide the same present value cost as the old terms. Assume a business transaction where the buyer can either pay by check or by electronic transfer. If the difference between the value date of the payment methods (from the buyer's perspective) is three days, then float neutral terms would either allow the buyer to pay electronically three days later than by check or the buyer should be offered a discount to make the electronic payment equivalent to the check payment. This example assumes no difference in the cost of the payment methods to the buyer. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-058

A business wants to secure its e-commerce system so that any trading partner can initiate a transaction or send a message but the same partner cannot use their security access to view another trading partner's messages. Which of the following will allow the company to create these levels of encryption? 1. Tokens 2. Public/private key (PKI) structure 3. Digital signatures 4. Fingerprint or facial scan devices

2. Public/private key (PKI) structure Many popular encryption programs are designed using what is called a public/private key (PKI) structure. 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 public and is distributed to trading partners. Information encrypted with one key can only be decrypted and read using the other key. As a result, individuals encrypting data with the public key know that no one but the holder of the private key can access the data. Please refer to Chapter 15 topic 2 for more information on this topic. Question ID: CTP-PRE15.2-081

A group of companies in the glue manufacturing industry form the Glue Association, whose purpose is to absorb all product liability costs directed against its member companies. Which of the following BEST describes this association? 1. Contractual transfer 2. Risk retention group 3. Group captive 4. Single parent captive

2. Risk retention group A risk retention group is a special type of group captive formed under the terms of a US federal law that is designed to enable business firms to work together to jointly finance product liability claims. To the extent that risks are shared, this is considered insurance. These plans often are used in industries with a high potential for catastrophic losses, such as the airline industry and certain professional occupations (e.g., physicians in high-risk practice areas, accountants, or lawyers). Please refer to Chapter 16 topic 5 for more information on this topic. Question ID: CTP-PRE16.5-086

A bank bundles the home loan mortgages it has outstanding in order to raise liquid capital by issuing a debt instrument. It uses the mortgage payments it receives to pay off the principal and interest. What is this practice called? 1. Factoring 2. Securitization 3. Unsecured borrowing 4. Secured borrowing

2. Securitization Securitization is a financing method that frees up capital and enhances creditworthiness by using the buyer's installment payments to pay off the securitized instrument's principal and interest. Through securitization, a company 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. Please refer to Chapter 13 topic 4 for more information on this topic. Question ID: CTP-PRE13.4-072

Which of the following is a true statement regarding the structure of controls or the delegation of authority in treasury operations? 1. If a board of directors resolution grants the treasurer the authority to select financial institutions, he or she may not delegate part of this process to subordinates 2. There is no standard structure for a company to follow in determining the levels of control that should be in place 3. While correctly designed, operated, updated and monitored controls are necessary to prevent financial losses, they increase the difficulty of effective management 4. Controls on third-party service providers are outside the scope of most organizations' controls

2. There is no standard structure for a company to follow in determining the levels of control that should be in place There is no standard structure for determining the optimal levels of control that should be in place, but there are certain best-practice standards that should be followed, especially from an audit perspective. The analysis and understanding of operations gives rise to controls that can be implemented in a targeted and effective manner. Please refer to Chapter 18 topic 2 for more information on this topic. Question ID: CTP-PRE18.2-096

Which of the following statements is true regarding treasury procedures? 1. Procedures should contain the latest information even if it frequently requires updates 2. Treasury procedures are policy driven and therefore reinforce compliance with company policy 3. Procedures should provide just one way to perform any given task 4. Procedures should provide a clear listing of the roles and responsibilities for the key participants in the treasury area

2. Treasury procedures are policy driven and therefore reinforce compliance with company policy 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 policy. An organization should make this relationship explicit by tying procedures to their governing policies. Also, management should 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 employees. Listing of roles and responsibilities is a function of policies rather than procedures. Please refer to Chapter 18 topic 3 for more information on this topic. Question ID: CTP-PRE18.3-097

A trustee for a bond observes that the company issuing the bond has defaulted under its indenture. All of the following are examples of default EXCEPT ____________. 1. The firm misses the due date for the payment of interest 2. the bonds become unmarketable 3. The sinking fund is inadequately funded 4. The collateral is devalued or lost

2. the bonds become unmarketable An event of default may occur if a borrower breaches or violates any term or condition under a debt agreement. Examples include: Nonpayment of interest or principal when due A material adverse change (MAC) clause, which allows the lender to refuse funding or declare a borrower to be in default, even if all agreements are in full compliance Violation of a specified covenant (Sinking funds and Collateral are typically specified in covenants) Incorrect or misrepresented regulations or warranties A cross-default provision that puts a borrower in default if the borrower defaults on another debt agreement Please refer to Chapter 6 topic 3 for more information on this topic. Question ID: CTP-PRE06.3-025

If an investment bank offers both underwriting/distribution functions and investment advisory or management functions, which situation would be acceptable under U.S. Securities and Exchange regulations and ethics guidelines with regard to material non-public information (MNPI)? 1. Trading of personal securities based on MNPI available only to the buy side of the business and not to the sell side due to a "wall." 2. Acquiring MNPI in the buy side of the business and disseminating it to the sell side of the business 3. "Bringing someone over the wall" to provide value to underwriting, who does not comment on MNPI until it has been made public 4. Allowing MNPI acquired in the sell side of the business to influence the recommendations made by the buy side of the business

3. "Bringing someone over the wall" to provide value to underwriting, who does not comment on MNPI until it has been made public For full-service investment banks that offer both the underwriting/distribution function (referred to as the sell side of the house) and the investment advisory or management function (referred to as the buy side), there is a potential for conflict of interest. Both sides should be separated by internal controls and procedures (sometimes referred to as a "wall") that prevent each party from acquiring material nonpublic information (MNPI) from the other side of the transaction and acting upon it. It is important to understand that merely possessing MNPI is not a crime. The crime resides in the act of using the information. This situation sometimes occurs when a research analyst is "brought over" to work for the underwriting department in order to focus on a particular company. This is known as "bringing someone over the wall." Once the underwriting process is complete, the research employee who has been brought "over the wall" is not allowed to comment on any information learned in the underwriting process until it has become public knowledge. Please refer to Chapter 6 topic 2 for more information on this topic. Question ID: CTP-PRE06.2-022

If the spot exchange rate for U.S. Dollars to Euros is USD/EUR 0.8354 (units of currency per one USD), then how much would 500,000 Euros be worth in Dollars? 1. $664,905 2. $680,427 3. $598,516 4. $417,700

3. $598,516 FX rates, or spot rates, are quoted in several ways, depending on the currencies and the markets involved. An FX rate is typically expressed as the equivalent unit of one currency per unit of another currency at a given moment in time. Foreign currency quotation formats tend to be structured as: [Currency X] / [Currency Y] Rate. This can be read as "one unit of Currency X is equal to rate multiplied by one unit of Currency Y." To determine the cost in Currency Y of a given number of units of Currency X, just multiply that number by the rate. Conversely, to determine the amount of Currency X that could be purchased with a given amount of Currency Y, divide the amount of Currency Y by the rate. So, 500,000 Euros divided by 0.8354 is $598,516 U.S. Dollars. Please refer to Chapter 17 topic 6 for more information on this topic. Question ID: CTP-PRE17.6-092

Which of the following is true of common stock valuation? 1. The amount of cash flows can be known 2. Consideration of risk does not enter into common stock valuation 3. A required rate of return is used to estimate the stock's present value 4. The timing of cash flows can be known

3. A required rate of return is used to estimate the stock's present value Common stock valuation differs from bond and preferred stock valuation because both the timing and amount of cash flows associated with stock ownership are not fixed. To value common stock, an investor must estimate the present value of the future dividend stream. This involves estimating the future dividends and determining the appropriate required rate of return on the issuer's equity. Please refer to Chapter 19 topic 2 for more information on this topic. Question ID: CTP-PRE19.2-098

The Federal Deposit Insurance Corporation (FDIC) can do all of the following EXCEPT ____________. 1. Supervise selected depository institutions 2. Provide deposit insurance for all insured banks and thrifts 3. Act as the lender of last resort to ailing banks 4. Act as trustee in the event of bank or thrift failures

3. Act as the lender of last resort to ailing banks The FDIC is an independent agency of the federal government whose primary role is to protect depositors from losses caused by bank insolvency. It acts to boost confidence in the banking system, thereby reducing systemic risk. The FDIC's responsibilities include: Providing deposit insurance for all insured Financial Institutions (FIs) Supervising selected depository institutions Acting as a trustee in the event of bank failures It never acts as a lender to any bank Please refer to Chapter 2 topic 3 for more information on this topic. Question ID: CTP-PRE02.3-009

Which of the following is a communication protocol used to facilitate transmission of reporting and balance information from banks to their account holders? 1. ASC X12 2. ISO 20022 3. BTRS 4. UN/EDIFACT

3. BTRS BTRS is a communication protocol that has been developed by the ANSI ASC X9 committee to facilitate the transmission of balance and reporting information from banks and other financial institutions to their account holders. ISO 20022 is an XML-based messaging standard for the financial services industry, whose intended use is transmitting information related to securities, payments, card payment transactions, international trade, and foreign exchange transactions. UN/EDIFACT is a set of internationally agreed-upon standards, directories, and guidelines for electronic exchange of data. The Accredited Standards Committee (ASC) X12 of the American National Standards Institute (ANSI) is the coordinating body that develops cross-industry EDI message standards in the United States. Please refer to Chapter 15 topic 2 for more information on this topic. Question ID: CTP-PRE15.2-083

A company has a crisis when its celebrity spokesperson is arrested. The actions taken to communicate the company's stance toward this crisis to staff and customers are referred to as which of the following? 1. Contingency measures 2. Disaster avoidance, recovery and remediation 3. Business continuity 4. Disaster recovery

3. Business continuity Business continuity refers to the actions taken with regard to crisis management, alternative operating procedures, and communications to staff and customers. The intent of these actions is to preserve the firm's revenue stream. It is important that these plans be tested and reevaluated on a regular basis to ensure that they are effective and current. Please refer to Chapter 16 topic 6 for more information on this topic. Question ID: CTP-PRE16.6-087

To reduce invoice float, what is a critical factor when issuing invoices to your customer who utilizes "auto-match" processes to perform a three-way match prior to authorizing payment of an invoice? 1. Phone call to the customer after sending invoice 2. Fast invoice transmission to minimize invoicing float 3. Clearly stated payment terms and remittance instructions 4. Summary statements of outstanding invoices

3. Clearly stated payment terms and remittance instructions Effective A/R management includes reducing invoicing float, which is the interval between the time goods and services are sold to a customer and the time that a customer receives an invoice. The first step in collecting an account is sending accurate and timely invoices with clearly stated payment terms and remittance instructions. Delays in invoice preparation or errors on an invoice may extend the payment process. This is particularly an issue with customers that use "auto-match" processes that validate invoices against purchase orders and receiving statements (referred to as a three-way match) to authorize payment of invoices. Minor errors in an invoice can lead to lengthy delays in payment as a result. Please refer to Chapter 10 topic 6 for more information on this topic. Question ID: CTP-PRE10.6-046

A company would choose a company processing center instead of a bank lockbox for which of the following reasons? I. Control over operation II. Remote deposit capture (RDC) could make it the most cost-effective solution III. Float reduction 1. I only 2. I, II and III 3. I and II only 4. III only

3. I and II only The primary advantage of an in-house processing center is control of the collections operation. Maintaining control may be especially important in organizations where capturing very detailed remittance information is required in order the A/R department to properly apply the payments. Traditionally, in-house processing was performed either by very small firms with low volumes of check and card payments or by fairly large firms that could justify the expense of the automated equipment required to manage high volumes. The introduction of remote deposit capture (RDC) and improved scanning technology, along with increased use of electronic payment and remittance transmission methods, has changed these guidelines. In today's collections environment, the choice between using an in-house processing center and a lockbox must be evaluated carefully to ensure the most cost-effective solution for the company. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-057

In a letter of credit (L/C) transaction, the buyer's bank is called the ______________. 1. Correspondent bank 2. Advising bank 3. Issuing bank 4. Accepting bank

3. Issuing bank An L/C is 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. The L/C substitutes a bank's credit for that of the buyer, virtually eliminating the credit risk to the seller. The issuing bank is the importer's bank that issues the L/C in favor of the exporter. The advising bank advises the exporter of an L/C in its favor. Other banks that may be involved in the transaction are the negotiating bank and the confirming bank: The advising and negotiating banks are frequently the same bank, performing dual roles. The advising/negotiating bank examines the documents presented by the beneficiary (i.e., the exporter), receives payment from the issuing bank, and pays the beneficiary. If requested, the advising/negotiating bank may add confirmation, as the confirming bank, to an L/C. In doing so, the confirming bank commits to the exporter that payment will be made if documents meet the terms and conditions of the L/C, regardless of the issuing bank's ability to pay. If an L/C is confirmed, the confirming bank will be the negotiating bank, as well. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-063

How would a company go about performing the process of vouchering? 1. Have headquarters issue checks and funds and reconcile accounts 2. Separate expense approval, check-signing authority and account reconciliation responsibilities 3. Make a three-way match of invoice, purchase order and receiving information 4. Forward payments to the cash manager or disbursements area

3. Make a three-way match of invoice, purchase order and receiving information An A/P manager's primary responsibility is to verify incoming invoices and authorize payments (i.e., vouchering). This process generally involves the traditional three-way match, in which an invoice is matched to both an approved purchase order, as well as receiving and, in some cases, shipping information. This verification ensures that the items being billed to the company are authorized purchases from an approved vendor and that all items are received in satisfactory condition. Once the approval process is complete, the invoice is vouchered for payment. Please refer to Chapter 10 topic 8 for more information on this topic. Question ID: CTP-PRE10.8-049

The primary goal of treasury management is to _________________. 1. Establish credit policies and monitor accounts receivable balances 2. Prepare financial statements and budgets in accordance with IFRS or GAAP 3. Manage cash and financial assets to provide the financial flexibility needed to achieve the company's goals 4. Develop controls on collection and disbursement systems to protect the company against loss

3. Manage cash and financial assets to provide the financial flexibility needed to achieve the company's goals The primary goal of treasury management is to effectively and efficiently manage an organization's cash and related financial assets to support the achievement of the organization's business objectives and strategy. This goal is critical because all firms, no matter how successful, have a finite and variable amount of liquid assets on hand during a given period of time. Please refer to Chapter 1 topic 2 for more information on this topic. Question ID: CTP-PRE01.2-001

Which has both a fiduciary duty and provides investment recommendations to its customers? 1. Bank fulfilling paying agent and custody services roles 2. Bank fulfilling registrar and transfer agent roles 3. Registered investment advisor 4. Broker-dealer

3. Registered investment advisor A registered investment advisor is someone who is paid a fee to make investment recommendations for a client or group of clients. An investment advisor has a fiduciary duty to its clients that a broker-dealer does not. Please refer to Chapter 13 topic 2 for more information on this topic. Question ID: CTP-PRE13.2-068

Which risk increases when market interest rates fall? 1. Price risk 2. Marketability risk 3. Reinvestment risk 4. Liquidity risk

3. Reinvestment risk Interest rate risk involves the uncertainty associated with future interest rate levels. Interest rate risk has two components: reinvestment risk and price risk. The potential for lower interest rates results in reinvestment risk. After market interest rates drop, the proceeds from maturing investments will be reinvested at a lower rate. Reinvestment risk is also increased because fixed income securities are more likely to be called. Please refer to Chapter 13 topic 2 for more information on this topic. Question ID: CTP-PRE13.2-067

All of the following are advantages of forward contracts EXCEPT _____________. 1. That they can be for any amount 2. That they can cover any period of time 3. That they are continually marked-to-market 4. That they can be created for currency, commodities or financial instruments

3. That they are continually marked-to-market Forward contracts are private contracts (negotiated "over the counter," or OTC) between two parties and are customized to each party's needs. The amount of the underlying asset and the maturity date of the contract are established when the contract is negotiated. In some cases, delivery of the underlying asset takes place at the maturity of the forward contract. There are many different types of forwards, with currency forwards and interest rate forwards being the most common. Futures trading requires a margin account that is marked to market on a daily basis using the closing price of the previous business day. Marked to market means that the hedger's gains or losses on the position are reflected on a daily basis. Please refer to Chapter 17 topic 4 for more information on this topic. Question ID: CTP-PRE17.4-089

A dealer provides an FX spot quote as follows: USD/JPY 101.45 - 101.53 Which of the following is a correct interpretation of this FX quote? 1. The dealer is willing to buy one US dollar for JPY104.53 in 30 days 2. The dealer is willing to sell 101.45 US Dollars for one JPY 3. The dealer is willing to buy one US Dollar at JPY 101.45 4. The dealer is willing to sell one US dollar for JPY 101.45

3. The dealer is willing to buy one US Dollar at JPY 101.45 Banks and other dealers quote both bid and offer rates for foreign currency. The bid rate is the rate at which a dealer is willing to buy currency. The offer rate is the rate at which a dealer is willing to sell currency. The difference between the bid rate and the offer rate is referred to as the bid-offer spread or bid-ask spread. Both the bid and offer rates are for the same time period, spot or forward. The quote is a Bid-Offer quote which is formatted as [Currency X] / [Currency Y] Bid Rate - Offer Rate. The dealer in question posted quote is USD/JPY 101.45 - 101.53 meaning that the dealer is willing to buy (bid) one US dollar at JPY 101.45 and sell (offer) one USD at JPY 101.53. Please refer to Chapter 17 topic 6 for more information on this topic. Question ID: CTP-PRE17.6-093

Who assumes the obligation to pay when a documentary collection is used to sell goods to a foreign country? 1. The collecting bank 2. The remitting bank 3. The importer 4. The exporter

3. The importer Absent a formal letter of credit (L/C), banks that are involved in a documentary collection normally act only as collecting and paying agents and assume no direct obligation for ensuring that payment is made. Therefore, the obligation to pay rests with the buyer (importer). Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-062

Which of the following is true of a leveraged buyout (LBO)? 1. The acquirer carries the debt on its own balance sheet 2. Collateral for the debt cannot be from the acquired company 3. The purchased firm will have a high debt ratio 4. Most LBOs have the aim of keeping the purchased firm intact

3. The purchased firm will have a high debt ratio A leveraged buyout 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. A large fraction of the purchase price is debt-financed. Typically, a large portion of the debt is junk (i.e., below investment grade). Many LBO investor groups hope to capture value by selling off the acquired firm's assets in pieces. Some groups try to raise cash by selling poorer performing assets, and building sales and profits of the remaining assets, hoping to sell for a substantial profit at a later date. Please refer to Chapter 20 topic 4 for more information on this topic. Question ID: CTP-PRE20.4-106

A company is at risk of a hostile takeover if they issue any more common stock. However, the company wants to launch a new product division that promises to grow quickly but requires a large amount of upfront investment. Which of the following sources of funding would best meet their needs? 1. Convertible stock 2. Adjustable rate preferred stock (ARPS) 3. Tracking stock 4. New debt

3. Tracking stock A tracking stock is a separate stock created by a parent company to track the financial progress of a particular line of business. Despite being part of a publicly traded entity, tracking stocks trade under unique ticker symbols. These stocks are meant to create opportunities for investors to buy into a fast-growing unit without investing in the whole firm. The revenues and expenses of the segment being tracked are extracted from the firm's financial statements and are linked to the tracking stock for valuation purposes. Tracking stocks do not provide stockholders with ownership in the parent company, nor do they include voting rights. Please refer to Chapter 6 topic 4 for more information on this topic. Question ID: CTP-PRE06.4-030

What might be done when determining an acceptable present value of cash flows for the firm's investors? 1. Use the weighted average cost of capital as the all-in rate 2. Use the cost of capital as the markup rate 3. Use opportunity cost as the discount rate 4. Use the minimum payback period as the number of periods.

3. Use opportunity cost as the discount rate Note that when performing present value calculations, the process of calculating the present value of a future amount in the present is called discounting. For this reason, the investment rate used for present value calculations is commonly referred to as the discount rate. An important item to note is the various terminology used to describe the opportunity cost of funds. This rate may be referred to as an interest rate, investment rate, or discount rate, among others. The opportunity cost concept is an important aspect of time value of money because investors look to alternative investments in a particular risk class to determine the best rate of return available for a given level of risk. Investors in a firm's securities have this rate available to them in the marketplace, so they lose the opportunity to invest in the available alternative when they invest in the given firm's securities. Please refer to Chapter 9 topic 2 for more information on this topic. Question ID: CTP-PRE09.2-040

A company wants to estimate the overall risk of opening a new production facility. They have determined probabilities of each risk as well as its relevant monetary impact. Which of the following would summarize the potential impacts of the new plant in a single measure? 1. Monte Carlo simulation 2. Sensitivity analysis 3. Value at risk (VaR) 4. Scenario analysis

3. Value at risk (VaR) VaR was designed to incorporate a wide range of risk factors and summarize their impact in a single measure that answers the question: What is the most that I can expect to lose over a given period of time with a reasonable amount of certainty? That amount is the value at risk. The VaR approach uses the probability and monetary impacts of specified adverse events over a period of time to assess risk. 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. Scenario analysis is similar to sensitivity analysis, but more than one variable is altered at a time. Scenario analysis usually starts with a base case (i.e., an expected value for each input variable affecting the final value). Monte Carlo simulation is a complex method that uses probability distributions and random numbers to simulate values for various models. This approach uses specialized software to quickly simulate thousands of iterated values. Please refer to Chapter 16 topic 4 for more information on this topic. Question ID: CTP-PRE16.4-085

A payment that is due in 30 days and is eligible for a 1% discount if paid within 15 days of the invoice date would be represented by which of the following terms? 1. Net 30, 1/15 2. 30 net 1/15 3. 1/30 net 15 4. 1/15 net 30

4. 1/15 net 30 In addition to specifying a net due date, the seller may offer a discount on payments made prior to that date. An invoice where the total amount is due within 30 days and the buyer may take a discount of 1% if the payment is made by the 15th day would be represented by the terms 1/15 net 30. As an additional example, Terms of 2/10 net 30 mean that the total amount is due within 30 days of the invoice date, but the buyer can take a 2% discount if it pays within 10 days. Please refer to Chapter 10 topic 6 for more information on this topic. Question ID: CTP-PRE10.6-047

A United States federal or state-chartered financial institution that both accepts deposits and makes loans would fall into which of the following categories? 1. A brokerage firm 2. A consumer credit company 3. A mutual fund provider 4. A commercial bank

4. A commercial bank A commercial bank is an FI that accepts deposits and makes commercial loans. Commercial banks range from small, single-site community banks with several million dollars in assets to large, global FIs with trillions in assets. The rules and charters governing commercial banks vary across countries. In the United States, commercial banks must possess a federal or state charter. Please refer to Chapter 3 topic 2 for more information on this topic. Question ID: CTP-PRE03.2-012

A Certificate of Deposit (CD) represents the bank's obligation to pay ________________. 1. A fixed or variable interest rate until the deposit is withdrawn, which could be without notice 2. A rate of interest regulated by the US Federal Reserve 3. A rate of interest that is fully negotiable for any deposit amount 4. A fixed or variable interest rate over a specified period of time

4. A fixed or variable interest rate over a specified period of time A certificate of deposit (CD) is an example of a Time Deposit Account (TDA). Given a deposited amount, a CD holder earns a fixed or variable interest rate over a specified period of time. For CDs under $100,000, the interest rate is usually fixed and nonnegotiable. Please refer to Chapter 7 topic 2 for more information on this topic. Question ID: CTP-PRE07.2-036

Which of the following is a commonly used method for short-term cash forecasting? 1. Value at risk 2. Percentage-of-sales method 3. Forecasted financial statements 4. Accounts receivable balance pattern

4. Accounts receivable balance pattern For short-term cash forecasts, many firms use information that is related to expected receipts and disbursements in the near future. There are several methods to develop short-term cash projections that incorporate factors affecting cash flow. Three of the more important methods include an A/R balance pattern forecast, a receipts and disbursements forecast, and a distribution forecast. Please refer to Chapter 14 topic 4 for more information on this topic. Question ID: CTP-PRE14.4-076

Which of the following statements is true of US money market funds (MMFs) and the U.S. Money Market? 1. MMFs may not hold securities whose maturity exceeds 365 days 2. Funds are regulated by the Office of the Comptroller of the Currency (OCC) 3. MMFs can invest in illiquid securities to meet maturity and diversity requirements 4. All funds are permitted to value to a floating or variable net asset value (FNAV/VNAV)

4. All funds are permitted to value to a floating or variable net asset value (FNAV/VNAV) The term 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 are defined as having a maturity of one year or less and are generally debt instruments. Examples of money market securities include negotiable certificates of deposit, banker's acceptances, government securities (e.g., US Treasury bills, municipal securities), commercial paper, municipal notes, and repurchase agreements. In the United States, MMFs are regulated by the SEC, which under Rule 2a-7 restricts investments in MMFs by quality, maturity, and diversity. MMF regulation focuses on a number of key features, including: Permitted investments and diversification rules. Funds may be limited to holding only money market instruments with certain characteristics—for example, a fund must hold government securities, or instruments guaranteed by the government, in order to qualify as a government fund. In addition, holdings are subject to counterparty limits to achieve fund diversification. Portfolio rules. MMF portfolios are subject to maximum weighted average maturity (WAM) and weighted average life (WAL) rules. Liquidity requirements. Funds are required to hold a specified minimum proportion of assets that mature overnight and within a week. Fund pricing. All funds are permitted to value to a floating or variable net asset value (FNAV/VNAV). Funds investing in government securities are permitted to value to a constant net asset value (CNAV). Please refer to Chapter 5 topic 3 for more information on this topic. Question ID: CTP-PRE05.3-021

Which of the following is true of a stock split? 1. A reverse split is usually initiated by a company to avoid a false expectation that dividends were increased "permanently" 2. A stock split can be initiated to prevent the firm's shares from being delisted by an exchange. 3. Most evidence indicates that reducing the share price will activate latent demand and the share price will decrease 4. At the moment in time when the stock split occurs, the aggregate value of shares will be the same after the split as before

4. At the moment in time when the stock split occurs, the aggregate value of shares will be the same after the split as before A stock split occurs when an existing share is split into more than one share at a reduced share price, thereby placing the stock into a more desirable price range. The basic idea behind a stock split is that an optimal trading range exists for a stock's price. By reducing the price, it is possible that latent demand may become active and trigger an increase in 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. The primary motivations for a reverse split are to avoid having the firm's shares be delisted by an exchange under the exchange's minimum price policy and to place the stock price within a higher range deemed desirable by management. Please refer to Chapter 20 topic 4 for more information on this topic. Question ID: CTP-PRE20.4-105

After an issuing bank acknowledges a time draft that draws on a letter of credit (L/C), what does this draft become? 1. Commercial paper (CP) 2. Promissory note 3. Documentary collection 4. Banker's acceptance (BA)

4. Banker's acceptance (BA) An L/C may provide either immediate payment (i.e., sight draft) or deferred payment (i.e., time draft) to the exporter. When the L/C requires the presentment of a sight draft, then the advising/negotiating bank pays the exporter immediately and is reimbursed by the issuing bank. When the L/C requires presentment of a time draft, the exporter provides credit terms to the buyer. The exporter may be able to receive payment prior to maturity by discounting (i.e., selling at a discounted value) the time draft to a local bank. At this point, the discounted L/C becomes a banker's acceptance(BA). A BA can be used to finance the import, export, or domestic shipment of goods, as well as the storage of properly titled goods. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-061

Financial institutions have the ability to offer earnings credit or interest on which of the following accounts in the U.S.? 1. Certificates of deposit (CDs) 2. Commercial bank passbook savings accounts 3. Money market deposit accounts 4. Demand deposit accounts (DDAs)

4. Demand deposit accounts (DDAs) DDAs are interest-bearing in many countries, including the US. For many decades, however, this was not the case as Reg Q prohibited FIs operating in the US from paying interest on DDAs held by for-profit companies. In lieu of interest, corporate account holders received earnings credits, which were used to offset bank service charges. The passage of the Dodd-Frank Act in 2010 has since repealed Reg Q. Still, most US-based firms continue to be compensated for funds held in DDAs with earnings credits. CDs, savings accounts and money market deposit accounts (MMDAs) are types of time deposit accounts (TDAs) that earn interest but earnings credits do not apply to them. Please refer to Chapter 7 topic 2 for more information on this topic. Question ID: CTP-PRE07.2-032

All of the following factors should be considered when identifying and organizing data for cash flow forecasting, EXCEPT ____________. 1. Desired type of forecast 2. Reporting requirements 3. Bank account structure 4. Format of output

4. Format of output Identifying suitable data is an important part of the cash flow forecasting process. Omitting relevant data may lead to unexpected cash shortages or surpluses. The following factors should be considered when identifying and organizing data: Available information Assumptions Desired type of forecast Source of information Bank account structure Consideration of the output format would occur after making considerations for data identification and requirements. Reporting Requirements Historical Data Please refer to Chapter 14 topic 4 for more information on this topic. Question ID: CTP-PRE14.4-075

Foreign exchange (FX) risk can be divided into implicit and explicit risk. For a U.S. company that offers products for sale in England, which of the following periods in a transaction lifecycle would be exposed to Explicit risk? I. Product prices set (beginning of season) II. Product order (firm commitment) and raw material purchase III. Product shipped (sale recorded and receivable booked) IV. Cash settlement 1. From I to II 2. From II to IV 3. From II to III 4. From III to IV

4. From III to IV Cash flow exposure (implicit risk) is the risk that the value of future transactions will change due to changes in exchange rates. The firm has cash flow exposure from the time that a sale is expected until the sale occurs. For example, a company may publish price lists in a foreign currency or make a firm quote in a foreign currency. These result in a cash flow exposure until such time as a sale is actually made and the sale recorded. For this reason, companies with extensive foreign currency transactions often manage their FX risk based on projected sales to account for implicit risk. Balance sheet exposure (explicit risk) is the risk that occurs due to changes in FX rates between the time a transaction occurs and the time it is finally settled. For example, a Canadian-based company sells a product denominated in Japanese yen (JPY) for payment in 30 days. The company is subject to balance sheet exposure from the time of the sale until the receivable is actually collected. Please refer to Chapter 17 topic 2 for more information on this topic. Question ID: CTP-PRE17.2-088

The Electronic Federal Tax Payment System (EFTPS) is used for collecting which of the following types of tax deposits? I. Corporate business II. Corporate excise III. Employee salary and wage 1. I and II only 2. I and III only 3. III only 4. I, II and III

4. I, II and III 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. Please refer to Chapter 12 topic 2 for more information on this topic. Question ID: CTP-PRE12.2-055

Which of the following are primary determinants of the mix of debt, equity and other forms of capital in a company? I. Operating risks II. Immediate and expected long-term financing needs III. Current debt and equity costs relative to each other IV. Senior management's risk taking attitudes 1. I, II and III only 2. I, III, and IV only 3. II, III and IV only 4. I, II, III and IV

4. I, II, III and IV Several general factors that CFOs and treasurers should consider when assessing capital structure include the following: The firm's operating risks and earnings volatility Its immediate and expected long-term financing needs The relative costs of debt and equity at the time funds must be raised The risk tolerance of the board of directors and senior management The impact on the firm's credit rating Please refer to Chapter 20 topic 2 for more information on this topic. Question ID: CTP-PRE20.2-103

The primary job of bank regulators includes which of the following? I. Implementing safeguards to reduce systemic failure risks II. Ensuring depositors have an incentive to investigate prospective bank creditworthiness III. Placing restrictions on the actions banks can take IV. Monitoring credit and liquidity risks relating to potential bank failures 1. II and III only 2. I, II, III and IV 3. I and IV only 4. I, III and IV only

4. I, III and IV only There are three areas in which financial regulation is usually concentrated: (1) maintaining a safe and sound financial system, (2) retaining market confidence, and (3) protecting consumers. There are several approaches regulators can take to address these risks, and most countries impose regulatory oversight of some type on the traditional banking functions. Such oversight results in restrictions on the banks' actions in order to manage the overall riskiness of the financial system and reduce the impact of potential bank failures. Please refer to Chapter 2 topic 2 for more information on this topic. Question ID: CTP-PRE02.2-007

The ISO 20022 Payment Standard is being used as the model to resolve what problem that was historically encountered with electronic funds transfers (EFTs)? 1. Automatic matching of receivables against invoices 2. Manual nature of setting up non-repetitive wire transfers 3. Inconsistent funds settlement timing 4. Inability to transmit remittance information with the payment

4. Inability to transmit remittance information with the payment Historically, one of the problems with EFT transactions, both large dollar and ACH systems, was the inability to transmit remittance information with the payment. As a result, companies received remittance information separately from the electronic payments and were forced to match the two. This is a particular problem when trading partners or customers are making partial payments or taking deductions from the face amount of an actual invoice. As a result, many of the EFT systems around the world have introduced extended remittance information capabilities largely modeled after the ISO20022 Payment Standard supported by SWIFT. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-060

The nominal rate is defined as the risk-free rate plus which of the following premiums? 1. Default premium 2. Liquidity premium 3. Maturity premium 4. Inflation premium

4. Inflation premium The real risk-free rate of interest is generally 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 first adjustment to the real risk-free rate is for 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 (IP) is commonly referred to as the nominal rate. Please refer to Chapter 13 topic 5 for more information on this topic. Question ID: CTP-PRE13.5-073

Which factor would promote an increased mix of equity in a capital market investment portfolio? 1. Preference for private rather than public equity 2. Capital preservation goals and conservative risk tolerance 3. Shorter desired maturity 4. Lower short-term liquidity requirements

4. Lower short-term liquidity requirements A careful analysis of the investor's risk tolerance is a starting point for determining the optimal asset allocation. 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. Please refer to Chapter 19 topic 3 for more information on this topic. Question ID: CTP-PRE19.3-099

Which of the following can be a type of off-balance-sheet financing? 1. Banker's acceptance 2. Commercial paper 3. Capital lease 4. Operating lease

4. Operating lease Operating leases are often done on an off-balance-sheet basis, meaning that lease payments are reflected only on the lessee's income statement. That is, neither the assets nor the lease appears on the lessee's balance sheet, while the lease payments simply appear as an expense on the income statement. Please refer to Chapter 20 topic 5 for more information on this topic. Question ID: CTP-PRE20.5-107

Which of the following derivatives requires the holder to pay a premium to the writer? 1. Futures 2. Forwards 3. Swaps 4. Options

4. Options An option is a contract giving the buyer of the contract the right, but not the obligation, to buy or sell a fixed amount of an underlying asset at a fixed price on certain dates. The fixed price is known as the strike price. The counterparty is called the writer of the option and receives the premium (price) paid for the contract. Forwards, futures, and swamps do NOT have a premium associated with them. Please refer to Chapter 17 topic 4 for more information on this topic. Question ID: CTP-PRE17.4-090

Which of the following is one way that the Dodd-Frank Act brings more transparency and accountability to the derivatives market? 1. Requires central clearing and exchange trading of all over the counter derivatives 2. Provides regulators with the authority to impose margin requirements on end users 3. Grants exclusive regulatory oversight of over-the-counter derivatives to the SEC 4. Requires data collection and publication through clearinghouses or swap repositories

4. Requires data collection and publication through clearinghouses or swap repositories Specifically, with respect to derivatives, the Act: Closes Regulatory Gaps: It provides the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) with authority to regulate over-the-counter (OTC) derivatives, so that irresponsible practices and excessive risk-taking can no longer escape regulatory oversight. Requires Central Clearing and Exchange Trading: The Act requires central clearing and exchange trading for derivatives that are cleared or settled through exchanges. It also provides a role for both regulators and clearing houses to determine which contracts should be cleared. In recognition of the fact that many companies enter into OTC derivatives for important economic reasons, including but not limited to risk management, the act provides an exception to the central clearing requirement for some 'end users.' To qualify for the exception, the end user must not be a financial entity, the derivatives must be used only for hedging purposes, and the company must satisfy reporting requirements established by the CFTC. Requires Market Transparency: It requires data collection and publication through clearinghouses or swap repositories to improve market transparency, and provides regulators with important tools for monitoring and responding to risks. Adds Financial Safeguards: It increases the safety of the system by ensuring that dealers and major swap participants have adequate financial resources to meet responsibilities. The act also provides regulators with the authority to impose capital and margin requirements on swap dealers and major swap participants, but not on end users. Sets Higher Standards of Conduct: It establishes a code of conduct for all registered swap dealers and major swap participants when advising a swap entity. When acting as counterparties to a pension fund, endowment fund, or state or local government, dealers are to have a reasonable basis to believe that the fund or governmental entity has an independent representative advising it. Please refer to Chapter 2 topic 4 for more information on this topic. Question ID: CTP-PRE02.4-010

A company would use which of the following to measure the qualitative and quantitative performance provided by its banks? 1. Number of visits by bank service representatives 2. Account analysis and billing statements 3. Informal annual relationship review 4. Scorecard

4. Scorecard A scorecard is a management tool used to qualitatively and quantitatively measure the FSP's performance. The primary purpose of a scorecard is to provide feedback on the service provided and the benefit received. The scorecard also allows the provider to better understand how the customer perceives the combination of the quality and cost of the services provided. Please refer to Chapter 7 topic 2 for more information on this topic. Question ID: CTP-PRE07.2-033

Producing an accurate cash flow forecast requires treasury professionals to do which of the following? 1. Synchronize cash inflows and outflows 2. Use a consistent forecasting method for short-, medium- and long-term forecasting 3. Perform in-sample rather than out-of-sample validation 4. Separate cash flow into its key components

4. Separate cash flow into its key components To produce an accurate cash forecast, it is helpful to separate cash flow into its key components. One approach is to aggregate cash flows by type of activity: operating, investing, or financing. These categories can be segregated further into inflows and outflows. For example, operating cash inflows might be segregated by product line, type of customer, and sales region. Operating cash outflows can be segregated into large-dollar vendor payments, small-dollar vendor payments, payroll, taxes, and other expense categories. As a general rule, it is better to begin with broad categories then refine the categories as more information about the inflows and outflows becomes available. The cash flow forecasting method used often depends on the forecasting horizon. For example, the method most appropriate for making a daily cash forecast is probably not the best method for making a monthly forecast. Please refer to Chapter 14 topic 4 for more information on this topic. Question ID: CTP-PRE14.4-074

Which of the following statements is true regarding the use of account analysis statements from banks? 1. Banks use standard terminology in describing services 2. They are used for reporting purposes only, not for billing. 3. The ASC X12 822 transaction set is incompatible with the AFP standard account analysis format 4. Standard formats can resolve errors in volume and pricing

4. Standard formats can resolve errors in volume and pricing Account analysis statement provides information on the services provided, balances maintained, transaction/item volumes processed, charges assessed, and earnings credit allowances. It is important to note that banks may not use the same terminology when describing products/services. Some services and fees may be combined into a single line item or flat fee, and these combinations may vary from bank to bank. The ASC X12 822 transaction set accommodates the AFP standard account analysis format and AFP Service Codes. Please refer to Chapter 7 topic 2 for more information on this topic. Question ID: CTP-PRE07.2-035

A real-time gross settlement (RTGS) transaction is final when which of the following occurs? 1. The request is received by the originating bank 2. The receiving bank acknowledges receipt of credit 3. The originating bank debits the payor's account 4. The receiving bank is notified by the RTGS processor

4. The receiving bank is notified by the RTGS processor Most systemically important systems settle payments individually and in real time, using real-time gross settlement. RTGS systems clear and settle individual transactions continuously throughout the system's 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. Examples of RTGS systems used for transfers throughout the world include Fedwire (US), CHAPS (United Kingdom), LVTS (Canada), TARGET2 (eurozone), and CNAPS (China). Please refer to Chapter 4 topic 4 for more information on this topic. Question ID: CTP-PRE04.4-015

All of the following are primary reasons why treasury policies and procedures are needed EXCEPT ____________. 1. 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 2. To provide a control process to mitigate the identified risk in the operation 3. To provide an effective internal audit and control tool that helps keep a company in compliance with regulatory and legal requirements 4. To provide a framework for treasury strategy formulation that encourages educated risk taking and development of innovative treasury solutions

4. To provide a framework for treasury strategy formulation that encourages educated risk taking and development of innovative treasury solutions Treasury strategy is developed outside of the treasury policies and procedures. Rather, treasury policies and procedures are one way in which treasury strategy is enacted. Please refer to Chapter 18 topic 2 for more information on this topic. Question ID: CTP-PRE18.2-094

SWIFT would MOST LIKELY be selected to be used in which of the following scenarios? 1. To settle international electronic payments 2. To transmit intracompany netting transactions 3. To initiate consumer bulk payments 4. To send instructions relating to a letter of credit

4. To send instructions relating to a letter of credit SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a communication system used by most of the banks in the world to transmit payment instructions, among other things, and is therefore often thought of, incorrectly, as an international wire transfer or funds transfer system. SWIFT is an industry-owned, cooperative, interbank telecommunication network that enables banks, nonbank financial institutions, and some corporations to send authenticated electronic messages in standard formats. The information that moves through SWIFT ultimately results in value being transferred from one party to another, generally through correspondent banks. SWIFT communications contain payment-related information, but do not actually transfer value. Communications that are initiated and received by member banks are known as SWIFT messages. These messages cover a wide range of international banking services, and include balance reporting, letters of credit (L/Cs), documentary collections, and FX transactions. Through the SWIFT network, a company can request a bank to initiate a balance transfer or foreign payment. Please refer to Chapter 4 topic 4 for more information on this topic. Question ID: CTP-PRE04.4-018

Which of the following provides a tangible economic benefit because it is a way to avoid incurring debt or liquidating investments? 1. Arbitrage 2. Zero coupon bonds 3. Internal factoring 4. Trade credit

4. Trade credit Trade credit arises when a customer receives goods or services but payment is not made to the supplier until a later date. Trade credit is the primary source of short-term financing used by many firms, since trade credit 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. Trade credit provides a tangible economic benefit as a source of financing because the buyer may avoid liquidating investments or incurring debt over the credit period. A firm that pays its suppliers before the invoice's due date (assuming no discount for early payment) may be forgoing an inexpensive source of short-term financing. Please refer to Chapter 13 topic 4 for more information on this topic. Question ID: CTP-PRE13.4-071

The issuance of additional debt can affect which of the following? 1. WACC (the cost lowers in a linear fashion) 2. Stock value (it is diluted to a point, then rises) 3. Stock value (the value is diluted) 4. WACC (it will lower to a point, then rise)

4. WACC (it will lower to a point, then rise) Suppose a firm was financed entirely by equity. The capital cost is simply the cost of equity. If a small amount of debt was then substituted for equity in the capital structure, the WACC would decrease because debt is cheaper than equity. The debt ratio would still be very low, while the coverage ratios (e.g., times interest earned) would be very high. However, at some degree of indebtedness, adding more debt will cause the WACC to increase. From the perspective of shareholders, an increase in debt may signal a reduction in the firm's ability to distribute earnings via dividends. To compensate for this, shareholders will require a higher return on their capital. Thus the cost of equity increases. Furthermore, an increase in debt may cause creditors to increase the interest rate on future loans. Both effects result in an increased WACC. Please refer to Chapter 20 topic 2 for more information on this topic. Question ID: CTP-PRE20.2-102

A smaller number of payments with attached remittance information (that is unreadable my machines) is a characteristic of which of the following payment processing systems? 1. Retail lockboxes 2. Company processing centers 3. Hybrid (or "Wholetail") lockboxes 4. Wholesale lockboxes

4. Wholesale lockboxes Wholesale lockboxes typically process B2B payments. Although wholesale lockboxes do not handle the payment volume of retail lockboxes, the former must handle remittance information that is usually not machine-readable. Subsequently, treasury professionals tend to use wholesale lockboxes when the dollar value of their payments is high, payment volume is lower, and the remittance information does not include a standardized remittance coupon. Hybrid (or "wholetail") lockboxes combine features of both wholesale and retail lockboxes. Specifically, a hybrid lockbox would handle smaller volumes but machine readable remittance documents. Please refer to Chapter 12 topic 3 for more information on this topic. Question ID: CTP-PRE12.3-059