Chapter 13

Question 1

4(2) CP Program

Answer 1

• private placement
• max 397 days
• $250K +
• no restriction on use of proceeds
• institutional investors and qualified institutional buyers (QIBs)

Question 2

3(a)3 CP Program

Answer 2

• private placement CP
• proceeds: working capital ONLY
• max 270 days
• minimum amt of $100K
• accredited investors

Question 3

3 basic cost components for lines of credit

Answer 3

• all-in rate
• commitment fees
• compensating bals

Question 4

assumptions made when determining the basic components of interest rates

Answer 4

• US Treasuries are “risk-free,” with no default risk
• No liquidity risk for US Treasuries
• Both corp. and municipal bonds have default and liquidity risk
• Maturity risk increases with the issue’s time to maturity

Question 5

holding period yield

Answer 5

return investor earns, holding the investment

2 yields commonly quoted for ST investments (both annualize holding period year to aid in comparison to other ST investment)

• money market yield (MMY)
• bond equivalent yield (BEY)

Question 6

money market yield (MMY)

Question 7

bond equivalent yield (BEY)

Answer 7

• is the nominal yield quoted on a 365-day basis
• enables comparison of alternative investments quoted and priced differently

Question 8

rating agency: standard ratings

Answer 8

not completely equivalent, S&P’s rating of A-1 is roughly equivalent to Moody’s “Prime-1 rating”… A-2 is comparable to Prime-2, A-3r to Prime-3 rating

Not Prime falls at the bottom of the rating scale.

Question 9

Treasury bill (T-bill)

Answer 9

• a money mkt instrument
• uses a 360-day year basis to annualize the holding period yield

Question 10

inverted yield curve

Answer 10

• downward sloping yield curve
• investors prefer LT securities (issuers prefer ST borrowing)
• anticipating rate hikes
• increase demand for LT securities increases their price, and decreases yields– thus pushing down the LT end of the curve

Question 11

active investment strategy

Answer 11

• investor must be prepared to sell holdings when their prices rise
• depends on interest rates falling or on relative creditworthiness improving
• in-house or outside investment mgr. is responsible for ST investment decisions
• must be able to forecast ST cash needs and imminent interest rate changes

Question 12

credit rating agencies (CRAs)

(aka Nationally Recognized Statistical Rating Orgs (NRSROs))

Answer 12

• assign credit ratings for issuers of short- and long-term debt obligations and debt instruments
• credit rating = assessment of potential for downside/loss on the investment
• provide opinion on obligor’s overall capacity to meet fin. obligation
• use confidential, non-public information when making rating decisions

Question 13

board-approved investment policy should include (12 things)

Answer 13

1. Investment objectives (risk and rtn.)
2. Ok and prohibited investment vehicles/classes
3. Minimum/acceptable security ratings
4. Max. maturity (individual securities)
5. Max. weighted avg. maturity/duration (portfolio)
6. Max. % of portfolio allowed for investment in individual securities, companies, instrument classes, geographic areas or investments in the same industry
7. Policies/guidelines for foreign securities investments
8. Specific responsibilities to implement policy
9. Methods to monitor compliance/internal controls
10. KPIs (measure, evaluate, report)
11. Responsibilities/reporting for custodians, external investment mgrs, broker-dealers, others
12. Exception mgmt/approval processes

Question 14

revolving credit agreement (revolver)

Answer 14

• With > 1 yr on a multiyear revolver, can be a LT liability on borrower’s BS.
  *

Question 15

Answer 15

Question 16

Dividend capture

Answer 16

a tax-motivated, ST investment strategy available to tax-paying corps. in the US

• Firm may exclude from TI 70–80% of dividends rcvd. from stock owned in another corporation, as long as it owns the stock for +46 days of the 91-day period starting 45 days prior to the ex-dividend date.
• A firm purchases common stock in another firm after the dividend announcement, then sells it after the ex-dividend date, ensuring that at least 46 days of ownership elapse.