Cash Management (2)

Question 1

What are potential sources of short-term funding?

Answer 1

Debt factoring
Bank overdraft
Short-term loans

Question 2

What are potential sources of surplus funds?

Answer 2

Overfunding
Disposal of surplus assets or divisions
Operating surpluses

Question 3

What is overfunding?

Answer 3

Proceeds which are not yet fully required may have already been received from a share/debt issue

Question 4

How should long-term surpluses be invested?

Answer 4

Into positive NPV projects, or used to pay a dividend

Question 5

How should short-term surpluses be invested?

Answer 5

The general rule is to invest in short-term, low-risk, highly liquid investments

Question 6

Why do most businesses look for a variety of investments?

Answer 6

Minimise the risks involved

Ensure that some cash is available at short notice

Invest some in the longer term to obtain higher interest rates

Question 7

What are factors to take into consideration for investing surplus funds?

Answer 7

Amount of funds available

Required level of liquidity

Risk tolerance

The expected return on the proposed investment

Question 8

What is the default risk?

Answer 8

The risk that the investment will not be repaid) should be considered

Question 9

What should be done with money market deposits?

Answer 9

These investments may have a notice period for withdrawals and therefore should only be used if there is high certainty of cash flows

Question 10

What is certificate of depsit?

Answer 10

Negotiable deposits issued by banks, with maturities from 28 days to five years

Question 11

What can holder do with certificates of depsit?

Answer 11

The holder can sell the certificate before its maturity date, so they are more liquid than money market deposits, but with lower returns

Question 12

What is treasury bills?

Answer 12

Two, three, and six-month UK government debt. These are very low risk and very liquid, but offer even lower returns

Question 13

What is gilts?

Answer 13

The long-term version of Treasury bills with maturities usually greater than five years

Question 14

Why is not recommended short-term cash surpluses be invested in newly-issued gilts?

Answer 14

Their market prices are very sensitive to interest rate changes

Question 15

What are other government bonds?

Answer 15

Rates on these bonds are tied to money markets and they have good liquidity.

Question 16

What are certificates of tax deposit?

Answer 16

Deposits with UK Inland Revenue that may be surrendered for cash or used in settlement of tax liabilities.

Question 17

What is commercial paper?

Answer 17

This is short-term (seven days to three months) unsecured debt issued by high-quality companies, good liquidity.

Question 18

What is corporate loan notes?

Answer 18

These are longer maturity, fixed interest securities issued by the corporate sector

Question 19

Issue with corporate loan notes?

Answer 19

Have risk higher than government bonds or commercial paper

Question 20

Why are equities not recommended?

Answer 20

Investing short-term cash surpluses in the stock market is not recommended because of the high risk associated with equity investments

Question 21

What must be considered with non-sterling instruments?

Answer 21

Exchange risk must therefore be considered