WCM 466 Central
What are the six steps in the modeling process?
1. Determine the question being asked. 2. Specify the variables to be used in the model. 3. Determining the relationship between the selected variables 4. Parameter estimation 5. Validation 6. Document the model
10. Define a controlled disbursement account and indicate why it appeals to companies. How is it different from a ZBA?
A Controlled Disbursement Account is a checking account for which the bank provides early morning presentment information via a telephone call, fax, Web site or computer message to the cash manager. The major advantage to the disbursing company is the ability to maintain zero or minimal balances in the disbursement account which means no disbursement forecast needs to be made If the controlled disbursement account typically maintains a zero balance which is actually negative by the amount of the day's presentments until the account is funded, it qualifies as one type of Zero Balance Account (ZBA).
1. What is a company's disbursement system, and why is it an important part of that company's short-term financial management? What principles should guide disbursement system decisions?
A DIBURSEMENT SYSTEM, IS A COMPANY'S payment METHODS, DISBURSMENT BANKS AND DISBURING LOCATIONS. PAYMENT, DOLLAR AMOUNT,S AND THE LOCATION AND TYPE OF COLLECTION SYSEM USED BY THE PARTY BEING PAID INFLUENCE WHERTHER A COMPANY OPTS FOR CHECKS, OR ELECTRONIC TRANSFERS. THE SYSTEM CHOSEN, AFFECTS VALUE ,BY CHANGING THE COMPANY'S COST STRUCTURE OR BY ALTERING THE PAYABLES CYCLE AND THEREBY THE CASH CONVERSION SYSTEM of the company. A company's disbursement policy, whether an informal strategy or a formal written document, should reflect the application of the four guiding principles: 1. Maximize Value Through Payment Timing: Payment should be timed to add the maximum value to the company. First, this is basically equivalent to asking the decision maker to minimize costs. Second, the principle implies that a company should take cash discounts when preferable. Third, within ethical, legal and practical constraints, a company may gain information and float advantages offered by strategic location of disbursement banks. 2. Optimize The Accuracy & Timeliness Of Information: Optimizing a company's configuration of disbursement systems means getting accurate information in a timely manner without incurring excessive costs. 3. Minimize Balances In Disbursement Accounts: Although some demand deposit balances may be necessary to support disbursements, as a rule these balances should be minimized except three conditions - first, nonprofit organizations, governmental agencies and sole proprietorships are permitted to have interest-bearing checking accounts and those with low average balances may not lose much interest by leaving funds in the disbursement account. Second, when the company contracts with its banks for a bundled package of services, a global systems approach may negate this principle. Third, compensating balances needed to support a loan may limit how far a company can go in reducing disbursement account balances. 4. Prevent Fraud: Fraud prevention and detection techniques, as well as greater use of electronic payments, are disbursement system essentials.
10. Explain the mechanics of interest rate resetting on variable rate demand note.
A debt instrument with a variable interest rate. Also known as a "floater" or "FRN," a floating rate note's interest rate is tied to a benchmark such as the U.S. Treasury bill rate, LIBOR, the fed funds or the prime rate. Floaters are mainly issued by financial institutions and governments, and they typically have a two- to five-year term to maturity.
5. What constitutes a useful forecast? What does usefulness include beyond forecast accuracy?
A forecast that is further enhanced if the variability of individual elements making up the forecast is specified. Management can calculate the probabilities of running short on cash and the need for potential magnitude of contingency plans. Risk analysis can be implemented by formally recognizing that some items are better characterized, as probability distributions not point estimates.
11. List and explain the advantages of pooling investors' monies in a money market mutual fund.
A money market mutual fund is when investor money's are pooled together to invest in short term securities. The advantages include: a. professional money management- professional money managers make the investment decisions and oversee the securities in the fund. b. Diversification on default risk- many issuers securities, and possibly even securities from issuers in various countries are included in the pool c. Higher yields- investment in much larger denominations than would be possible for any single investor increases overall yield d. Enhanced liquidity- as some investors withdraw funds, others are reinvesting individual securities do not have to be sold to fund withdraws. e. Greater flexibility- any combination of securities can be assembled by maturity, issuer type, issuer geographic location, or other mixes investors might desire.
12. Explain how an RP works and distinguish it from a sweep account
A repurchase agreement (RP, or "repo") is the sale of a portfolio of securities with a prearranged buyback one or several days later. As the sale price is less than the repurchase price, the difference constitutes the interest return. Sweep accounts are those in which excess funds are automatically or at the cash manager's request transferred ("swept") from the demand deposit account into an interest-bearing overnight investment.
9. Are agency securities a creditworthy as treasury securities? Explain.
Agencies are securities issued by governmental agencies and several private financing institutions that have governmental backing. For a slightly higher default risk and less liquidity investors gain higher yields on federal agency securities than on Treasury securities with similar maturities.
18. Summarize the survey evidence given regarding real life cash balance and investment portfolio management; are any of the findings surprising?
Based upon the survey and the critique I found that it was odd that a passive strategy should be used because of the inaccuracy of the forecast ability without certain knowledge.
7. Some observers consider the selection of the company's disbursing banks to be the most important disbursement related decision. Do you agree or disagree? Support your position.
Being able to provide the appropriate services in the right locations at the right price is critical to efficiently running a disbursement system. This is one of the starting points of a system,. A good relationship with your bank is very important in disbursements and I would rather have someone who is willing to work with me and provide me with as many services as possible. So yes I do agree that this is one of the most important decisions.
8. What are the pros and cons of using outside advisors to manage the company's short-term portfolio?
Briefly, outside advisors have the expertise and resources for efficiently conducting individual security and portfolio investment analysis. The disadvantage of using these advisors or fund managers is the expense involved.
3. Contrast business risk and financial risk. Of what relevance is either type of risk to the risk posture a company might take regarding short-term investments?
Business risk is the possibility that the company will be unable to meet ongoing operating expenditures, and financial risk is the possibility that the company will not be able to cover financing-related expenditures such as lease payments, interest, principal repayment, and preferred stock dividends. Larger cash and securities balances might be held by companies having significant exposure to either or both types of risk
2. How can a liquidity assessment be conducted? Why is this an important prerequisite to determining the target mix of cash and marketable securities?
By using current liquidity index or lambda and using low moderate and high liquidity strategies they can conduct the liquidity of a firm. Which shows how much cash a business can have in their target mix. Cash being the most liquid they want to keep their eyes on its levels within the mix.
1. Why do corporations put so much emphasis on cash forecasts? What happens if a company continually relies on inaccurate cash forecasts?
Cash forecasts are great for companies when it comes to cash budgeting, which are documents that show the anticipated receipts and disbursements for a period of usually a year. This can assist in planning cash management activities. The four factors that account for today's corporate emphasis on short term forecasts, are first, they drive the short term investing and borrowing strategies, secondly, its an important input into short term financial policy decisions, including disbursement policies, credit terms, and bank selection. Thirdly, they function as a control device, and lastly effective risk management is impossible without forecasts of the cash flow effects of interest rate changes, commodity price changes and foreign exchange rate changes.
8. How do a company's cash flow characteristics influence its selection of a disbursement system?
Cash management systems create value because cash flows are unsynchronized, uneven and uncertain, the predictability of those flows and whether the company typically is in a net-invested or net borrowed cash position. When you have a predictable cash flow system that is cash rick, you prefer a system in which surplus balances are easily and inexpensively transferred into interest bearing investments. -Payment methods -disbursement banks -locations
5. What are the advantages achieved by a company switching form decentralized to centralized disbursing?
Centralized allows the corporate headquarters staff to check each disbursement and possibly initiate each payment also, centralized data allows more rapid and accurate picture of disbursement timing and amounts providing a more accurate forecast and better decisions about such things as whether to take a cash discount -generally disbursement float is higher with centralized
11. Indicate the major electronic disbursing mechanisms
Companies use electronic funds transfers to fund disbursement accounts and also pay employees and suppliers electronically via ACH transfers. Paying vendors through ACH debits and credits is increasingly attractive to companies; though because of suppliers' inefficiency in processing customers' check payments, the disbursement float advantage of paying most suppliers by check has been greatly reduced in recent years. An ACH Debit is a payment order originated by the payee based on the prior authorization by the payer which is routed through the payee's bank. An ACH Credit is originated by the payer, so the routing bank is the payer's disbursement bank, such as- direct deposit, payroll, dividends, payment of trade accounts payable etc.
16. What is the mathematical relationship between the discount yield and the coupon equivalent yield?
Coupon-equivalent yield is calculated based on a 365-day year instead of 360 days which is the case for discount yield. It also bases the return on the amount invested, not the face value
8. Briefly summarize differences between daily cash forecasting and monthly forecasting
Daily cash forecasts: Used for short-term horizon. Mainly used in mid-sized or larger companies. Use the receipts and disbursements method. Usually a few large dollar items and many small dollar items. Monthly Cash Forecasting: Accuracy and usefulness are the main objectives of monthly forecasts. Want to avert overdrafts to determine short-term credit lines, and aid in the investment maturities when there is excess cash projected. Usefulness is to further enhance the variability of individual elements making up the forecasts. Find the Probabilities of running short on cash and contingency plans.
4. How does the roles of money market dealer and brokers differ?
Dealers typically "take a position" in the security instrument(s) they trade, meaning they hold an inventory of securities. Independent securities dealers, investment banks, and large commercial banks commonly have individuals that perform the dealer role. Brokers are also middlemen, but they do not inventory the securities they arrange transactions. When receiving an order, they check around for the security; when located, the brokers execute the trade. They are paid a commission for their services.
13. What types of risk are reduced by diversification?
Default risk and event risk are reducible by diversification.
14. Distinguish between discount securities and coupon securities
Discount securities do not pay coupon interest, meaning they are bought at a price below their face or par value and the investor receives face value at maturity. Coupon securities are bought at a given face value, on which the periodic interest is calculated. Interest may be added to the account within the holding period or at the end of that period.
Because the returns on most money market instruments are highly correlated, why does it make sense to spread a portfolio's allocation across various instruments and securities?
Diversification reduces risk, so simply looking at the typical return correlation masks the value gained by adding various instruments and securities.
8. Why would corporate investors use a dividend capture strategy? What is the major risk involved?
Dividend capture simply means buying a common or preferred stock shortly before it pays its dividend, or buying a preferred stock having an adjustable dividend payment. The major risk is a decline in the stock price during the holding period.
6. Why do Eurodollar CD's generally yield more than domestic negotiable CD's
Eurodollar deposits are not assessed an FDIC premium, nor are they required to have reserves held against them. The lower costs to issuers imply higher yields than domestic CDs for the investor.
6. Why is a company's forecasting philosophy an important ingredient in determining potential forecast accuracy?
Forecasting philosophy is an important ingredient because they affect the potential accuracy and usefulness of it s cash forecasts and the techniques used in making such forecasts. This philosophy is the views management has on the number and type of forecasts made, the amount of money the company is willing to spend, whether the company prefers internal or eternal forecasters, and the preference for a quantitative versus a judgmental approach to forecasting.
4. Apart from questions of legality, do you agree or disagree with the surveyed cash manager's views on the ethics of various disbursement practices?
I tend to agree with most of the managers decisions in finding that there were many unethical practices, but some that they saw as ethical, I feel were something that could be seen as unethical. Not legally speaking, but in terms of knowing you can't pay a check yet but writing it anyway assuming float time will cover it does not sound like a sound business practice in my opinion.
7. What steps should a portfolio manager follow when selecting individual securities for inclusion in the company's short-term securities portfolio?
If done internally, security selection can be a complex decision-making process. First, the basic objective is to balance risk and return within the parameters set by the company's investment policy. Second, unlike stock or bond portfolio management, safety predominates in the short-term portfolio. The securities portfolio represents a vital part of the company's liquidity, so security defaults or capital losses jeopardize the holder's financial health. Third, the investment manager must learn how to make security selection and disposition ("abandonment") decisions efficiently. Exhibit 15.3 shows graphically the risk-return steps the manager might follow, evaluating parameters such as the cash flow forecast, evaluating individual security risks, and redoing the risk analysis within the portfolio context.
3. Interest rates moved up today in the money market. Why this statement can be made without detailing the rates on each different type of money market instrument
Interest rates on money market securities typically move in unison.
16. Summarize the approach given for assessing the portfolio risk return tradeoff.
Invest in more than one security, and the risk will be generally lower than the average of the individual securities risks. The lower the correlation between two securities returns through time, the greater the reduction in risk that is achieved by combining them in a portfolio. The more diversity, or securities that the portfolio has, the less effect an individual security default has on the overall performance.
1. What is an investment policy? What are the key inputs that a company might use in developing the policy?
Investment Policy: is what defines the company's posture toward risk and return and specifies how that posture is to be implemented. The company's liquidity, its tolerance for risk, and whether any external third party restrictions limit investment policy. The investment policy defines the company's posture toward risk and returns and specifies how it is to be implemented. A common risk perspective is the evaluative criterion of "safety, liquidity, yields," implying that risk aspects take precedence over return because of the importance of preserving the principal invested. Inputs include the cash flow forecast, credit facility existence and amount, financial position, company risk assessment, liquidity assessment, and third-party restrictions.
1. Why is knowledge of the money market important for carrying out the value-maximizing short-term financial management? What are the opportunity costs of not taking into account the risk return tradeoffs of the various short-term instruments?
Knowing the available investment options and how to evaluate them is important for three major reasons. First, improved cash management and forecasting ability has its payoff in increased interest income or reduced interest expense. Second, even where the company is a net borrower during much of the year, it still needs a liquidity reserve. Third, the corporate treasurer must understand the money markets because each investment represents someone else's borrowing. Learning about potential investments implies understanding when and how each security could be used as a way to borrow funds. Ignorance regarding money market concepts might result in potential risks and returns being improperly appraised, but more typically the opportunity cost is losing the chance to have a greater return
3. Describe the three components of disbursements float and indicate whether disbursement float on a given check is always as the collection float on that check.
Mail Float -Processing Float -Clearance Float * Because Clearance float may differ from availability float on a given check, primarily related to slippage float on the part of the fed, disbursement float may differ and be longer than collection float** Delays created in the collection of payment on behalf of the supplier are referred to as Disbursement Float. Float refers the time lag between the events. Three types of delays can occur between the date the check is placed in the mail and the date the deposited check is cleared and cash is actually available in the bank account. The first delay is the mail time it takes for a check to arrive at its destination. This is referred to as Mail Float and the length of the delay is obviously related to the physical distance between the two points. The second delay is Check Processing Float. Once the check is received, it must be processed. That is, the envelope must be opened, the check prepared for deposit and then the check must be physically deposited in the firm's bank. The final delay is called Availability Float which indicates the availability time is the estimated time it will take to clear the check once it is deposited. Mail float varies from 1-5 calendar days, processing float varies from 1 ½ - 3 calendar days and clearance float ranges from 0 - 3 business days.
2. Remote disbursing was widely practiced in the 70's because the Federal Reserve granted availability much more quickly than it was able tot collect from banks in this clearing practices leading to significant fed float. Now that much of this type of float has been eliminated, at whose expense are companies achieving their float gains when slowing disbursements? How does the first disbursement system guiding principle apply here?
Maximize Value Through Payment Timing: Payment should be timed to add the maximum value to the company. First, this is basically equivalent to asking the decision maker to minimize costs. Second, the principle implies that a company should take cash discounts when preferable. Third, within ethical, legal and practical constraints, a company may gain information and float advantages offered by strategic location of disbursement banks.
6. Cash managers generally are part of a company's treasury department. With what other organizational units might cash mangers interface to determine disbursement policy and to make day-to-day disbursements
Organizational Unit Practices/ Policies Influenced Treasury Department: § Bank relationships § Bank services § Disbursement policies § Funding policies § Disbursement mechanisms § Account balance oversight Accounts Payable Department: § Disbursement records § Disbursement policies § Discount policies § Invoice information § Disbursement scheduling/ forecasts Production department: § Status of inventory position § Initiation of orders, quantities § Initiation of charge-backs Purchasing Department: § Negotiation for vendors, prices, terms § Discounts policies § Assist in determination of orders, quantities § Vendor relations § Use of electronic purchase orders, payment Personnel Department: § Negotiation of wages, pay periods § Localized payroll policies § Direct deposit policies
17. Contrast passive and active investment strategies giving and example of each.
Passive: involves a minimal amount of oversight and very few transactions once the portfolio has been selected. The buy-and-hold- strategy is a very popular strategy. This is part of a maturity matching approach to investing that prescribes investing in a security that will mature at the end of the investment horizon. Eliminates interest rate risk if the company does hold in the security to maturity as planned, because it will receive the face value of the security at that time. May be implemented by investing part, or all, of the portfolio in an index fund, which is a managed portfolio assembled to mirror a particular money market composite. Active: involves more trading and active monitoring of the portfolio and may be motivated by a philosophy that the investor can beat the market. One way to implement an active strategy is to try to spot inefficiencies in the way securities are priced at present and to by those that are underpriced, (higher yields than warranted by their riskiness) these are then held to maturity or sold at a gain when the marked corrects the mispricing. Historical yield spread analysis is an example of an active strategy.
14. Risk factors are interrelated. Explain
Portfolio risk=(default risk, liquidity risk, interest rate risk, reinvestment rate risk, event risk) A good example of this is the decision to match the maturity of the investment to the investment horizon.
9. What are the major differences between simple and complex disbursement systems? Construct a table showing the important differences
SIMPLE DISURSEMENT SYSTEMS Simple Disbursement Systems tend to be manual and paper-based. Standard payment services such as demand deposit accounts, payroll services and drafts are especially attractive to companies that have small daily cash flows, untrained treasury personnel, minimal computer facilities or skills and localized business dealings. Cash managers may select from three types of reconciliation - (i) Account Reconciliation is a disbursement-related service in which the company provides the bank with a record of checks drawn (ii) Paid-only Reconciliation reports all paid checks by check number, with check number, dollar amount and date paid (iii) Range Reconciliation provides subtotals of all checks within a range of check serial numbers (iv) Full Reconciliation provides detailed "checks outstanding" information, along with the "checks paid" data from company-supplied check issue detail. COMPLEX DISBURSEMENT SYSTEMS Complex Disbursement Systems are characterized by a greater use of electronic payments, specialized disbursement accounts, flexible account funding and greater control and information capabilities. These systems often are linked to the company's collection and concentration systems to maximize efficiency of funds movement.
2. What is the difference between a primary and secondary market? Why does a primary market's functionality depend on the secondary market?
Securities with an original maturity sold in the primary market or a current maturity of one year or less bought on the secondary market are considered to be part of the money market. It is in the primary market that investment bankers arrange for the marketing and pricing of new issues of money market securities. The secondary market, even more so than the primary market, is best thought of as a global network of telecommunication hook-ups between all potential buyers and sellers. Primary and secondary markets are inter-related because the larger the volume on the resale market, the less risk involved with buying the security on the primary market.
Distinguish between a deterministic model and a stochastic model.
Stochastic: some elements of the model are thought of as being random. They are probability distributions for one or more variables. Deterministic: A model that has no random factors. Single point estimates.
13. Why are sweep accounts done with a company's deposit bank the most convenient method of investing surplus cash balances? Why do large companies not use them as commonly as small companies?
Sweep accounts are those in which excess funds are automatically or at the cash manager's request transferred ("swept") from the demand deposit account into an interest-bearing overnight investment. Banks offer the convenience of "one-stop" shopping, automatic transfers of amounts above the compensating balance level, choices of several pooled investments to select from, and perhaps even an optional credit line paydown instead of investing the surplus. The bank merely makes a bookkeeping entry--no wire transfer is made--and the transaction can be fully automated by stipulating that any balances above some preset amount will be swept out nightly.
The short-term portfolio performance, can be assessed by taking the year-end account value, and dividing it by the year beginning value, and then subtracting 1 from the quotient." When is this statement invalid for assessing actual performance?
The allocation is more complicated when money is periodically added or withdrawn from the account during the succession of shorter periods making up the evaluated time frame.
7. Given that the major concern of short term corporate investing is safely of principal why are corporate investors buying unsecured CP?
The high-quality issuers that have always been able to issue commercial paper have been joined by medium-quality issuers offering credit enhancement in the form of collateral or a backup line of credit from their banks. While default risks are measurably higher for either type of commercial paper issuer, the default rates are still extremely low.
10. List the decisions the portfolio manager must make when the short-term investments portfolio is managed internally.
The manager must evaluate the following: Instruments - foreign or domestic, and what category, such as money market securities (and within that category, what type: Treasury-bills, commercial paper, etc.), preferred stock, common stock, or bonds; Issuers - Treasury, federal agency, municipality, corporate, including sectors within any of these that would be unacceptable in any situation; Denominations - generally larger denominations (the face value dollar amounts) would be chosen when feasible, due to their higher yields; Maturities - will the time when the face value is repaid by the issuer be matched to the investment horizon, and if not, how will the additional risk be weighed; Yields - although safety and liquidity often come before yield on short-term investments, the manager must determine when, if ever, the company will be more aggressive and "reach for yield;" and Risks - the probability of issuer default and bankruptcy, of a capital loss due to higher interest rates, and other aspects of overall investment risk must be traded off.
3. Why does top management focus more on the monthly cash forecasts than the daily forecast?
The monthly forecasts serve as a planning tool. They follow the typical billing cycle and payment cycle in most industries. They also are generally thought to be adequate for anticipating funding requirements. Using smaller time intervals, such as monthly allows managers to see disbursement and receipts much easier, and then financing is much easier to manage if needed. They also can alert management to threats to the organizational stability and survival. The main objectives of the monthly forecast are accuracy and usefulness.
17. Summarize the theories regarding the term structure of interest rates.
The oldest explanation and first in importance is the unbiased expectations hypothesis. This theory posits that the prevailing yield curve is mathematically derived from the present short-term rate and expectations for rates that will exist at various points in time in the future. Existing interest rates in today's markets are called spot rates; rates that the market collectively forecast today for future years are called forward rates. Combining the shortest-term spot rates with the forward rates being forecasted by the market, we can derive today's spot rates for medium-term and long-term securities. The second explanation for a yield curve's shape is the liquidity preference hypothesis. Higher yields are viewed as necessary to induce investors to tie their funds up for long time periods (in other words, to be illiquid) in light of the increasing interest rate risk. Preference for liquidity is thought to characterize enough investors that the yield curve (in the absence of expectations or other influences on other than the shortest-term securities) should slope upward from left to right. The longer the maturity, the larger the liquidity premium that must be offered to attract investors. The market segmentation hypothesis contends that instead of being close substitutes, securities with short, medium, and long maturities are seen by investors (funds suppliers) and issuers (funds demanders) as quite different. Supply and demand in each maturity spectrum determines the prevailing interest rate in that spectrum, and market participants do not arbitrage disparities across spectrums. The fourth hypothesis merges unbiased expectations and liquidity preference in the biased expectations hypothesis. Basically this is merely expectations modified by some degree of liquidity preference. Many market observers find the biased expectations hypothesis the most plausible of the four explanations.
5. Compare and contrast the low liquidity moderate liquidity and high liquidity strategies. Include the following in the answer: • Regardless of which strategy is used, what specifically is being determined? • The riskiness of each strategy • The likely profitability or return effects of each strategy. • Which strategy would you recommend to a stable consumer goods company tat is not currently facing any strong competition for its market position and is not likely to face strong competition in the near future? • What additional info about the company mentioned in d would you collect if you were actually making this decision?
The relative amount of a company's assets held in the form of cash and short-term investments. The lower the liquidity, the riskier the strategy, but also the higher the strategy's expected profitability (returns) because of relatively greater investment in high return-on-investment fixed assets (such as new product lines and new markets entered). The low liquidity strategy entails driving the investment in cash and securities to a minimum. Thus, as a proportion of total assets, cash and securities would be very small. Assuming the company does not subsequently over-invest in inventories and receivables, this approach should enhance profitability while also increasing business risk. The moderate liquidity strategy implies a somewhat greater investment in cash and securities, with correspondingly lower risk and lower profitability as compared to the low liquidity strategy. The high liquidity strategy prescribes a higher proportion of assets being held in cash and securities. Risks of default on securities and of bankruptcy are reduced because of the greater liquidity cushion, but profitability is lower as well.
6. What is the difference between the target mix decision and the management of cash and securities balances as they deviate from the target mix?
The target mix is the average or ideal mix of cash and securities. This may be based on historical averages or some kind of model. As they deviate from its chosen strategy it may either invest more, or less in cash and securities than the chosen strategy indicates. Cash is the most important to keep close to what is wanted in the mixed because it's the most liquid asset of the firm
15. What does it mean to say that risk estimates are uncertain?
The uncertainty of risk estimates refers to the fact that our risk estimates are subject to error.
9. List and define briefly the four major benchmarks that can be used for evaluating portfolio performance?
There are four main benchmarks that can be used to evaluate portfolio performance: U.S. Treasury instruments, other money market instruments, money market mutual funds (particularly when evaluating a bank or brokerage account return), and a synthetic composite. The synthetic composite is an artificial security which is devised to mirror the portfolio's average coupon interest rate, maturity, and risk rating.
4. Agency problems occur when managerial interest deviate from those of shareholders. Given that managers may be more interested in business and financial risk than systematic risk: • How might this affect the short-term investment policy? • What effect will this have on the investment returns earned??
This could cause the short term stock to be very sensitive, they are market related risks, lender bank and regulatory restrictions influence short term investments. This could cause the returns to be lower than they would have been.
7. Define the receipts and disbursements method of forecasting and briefly explain the process of developing a forecast using this method. why do most forecasters limit its use to very short-term cash forecasts?
This method involves looking up most of the data variables in company sources and estimating cash effect timing of non cash events such as product sales and material purchases. The process of developing the forecast is very simple. 1. The analyst must develop or look up the company's sales forecast. 2. Analyst lays out the incoming cash from cash sales, cash collections, asset sales, and other sources. 3. Cash disbursements, including payments to suppliers, employees, governments, and funds are arrayed. When using them longer than around a three-month period, they can become quite inaccurate, largely resulting from the accumulation of early error.
4. The cash budget is just a glorified name for a cash forecast. Agree? Why was this made?
Yes, it is just a monthly cash forecast is just a forecast on the horizon of a year, when done at the beginning of the year, its called a cash budget. A cash budget is a document showing anticipated cash receipts and disbursements for a future period of usually a year. This budget is formulated to be consistent with its operating budget, of planned sales and operating expenses
How are controlled disbursement accounts and ZBAs funded?
ZBA's are funded through interbank transfers from master accounts or concentration accounts, overnight bank loans paid off by next-day funds transfers, and money market funds. Controlled disbursement accounts are the same ways as ZBA's as well as maturing overnight investments, wire transfers, DTCs
5. Define the following: • Default Risk • Liquidity risk • Reinvestment rate risk • Interest rate risk • Prepayment risk
a. Default risk is the possibility that the issuer will not meet contractual obligations to pay interest or repay principal. b. Liquidity risk is tied to the marketability of a security--the ability to sell quickly at or very near the current market price. c. Reinvestment rate risk is the possibility that the investor will have to invest cash proceeds at a lower interest rate for the remainder of the predetermined investment horizon. d. Interest rate risk is the possibility that interest rates will increase, causing the prices of existing fixed-income securities to drop. e. Prepayment risk refers to a return of principal whenever a mortgage in the pool is paid off due to homeowner relocation or to a drop in general interest rates, which trigger refinancing.
