Cash Management

Question 0

List the different bank facilities.

Answer 0

1. Overdrafts- borrowing on short term basis
2. Term loan- borrow at fixed amount & pay back with interest over a period
3. Committed- bank makes stipulated amount available to borrower
4. Uncommitted- bank lends specified amount with no obligation to lend
5. Revolving- renewed after a set period, once paid customer can borrow again

Question 1

List the 3 benefits of holding cash.

Answer 1

1. Transactions - buy/ pay
2. Precautionary - buffer for uncertainty in cash flow predictions
3. Speculative - unforeseen profit-making opportunities

Question 2

How can short term financed be obtained?

Answer 2

Credit from trade suppliers

Overdraft facilities

Term loans

Debt financing

Question 3

What is Export Finance?

Answer 3

Trade Finance.
The financing of international trade. Includes activities such as lending, issuing letters of credit, factoring, export credit and insurance.

Question 4

What’s challenges are encountered with export financing?

Answer 4

Complex paperwork

Risk of bad debts

Export takes time to arrange

Transporting of goods can be slow

Higher investment in receivables

Political and foreign exchange risk

Question 5

What are Marketable Securities?

Answer 5

Any equity or debt instrument that is readily salable and can be converted into cash, or exchanged with ease.

Stocks, bonds, short-term commercial paper and certificates of deposit are all considered marketable securities because there is a public demand for them and because they can be readily converted into cash.

Question 6

What affects marketable securities?

Answer 6

Interest/ coupon rate

Risk associated with payment

Length of time to redemption/ maturity

Question 7

How do you calculate Market Price?

Answer 7

= interest yield/ gross interest * 100

**gross interest = market return/coupon rate

Question 8

YTM vs Coupon Rate

Answer 8

Yield to Maturity:

…the single discount rate applied to all future interest and principal payments. It will produce a present value equivalent to the price of the security.

Coupon Rate:

…the amount of interest paid every year. It is expressed as a percentage of the face value. Basically, it is the rate of interest that a bond issuer, or debtor, will pay to the holder of the bond.

For instance, if you hold a $100,000 bond, with a coupon rate of 5%, you will receive $5,000 in interest every year.

Question 9

Bond selling price: premium v. discount

Answer 9

1. At Premium
   …bond price > par value (interest rate is higher than current prevailing rates)
2. At Discount
   …bond price < par (interest rate is lower than current prevailing interest rates)

When you calculate the price of a bond, you are calculating the maximum price you would want to pay for the bond, given the bond’s coupon rate in comparison to the average rate most investors are currently receiving in the bond market.

Question 10

Calculating bond price:

Answer 10

The price of a bond is the SUM of the present values of all expected coupon payments + the present value of the par value at maturity.

Bond Price = [C/(1+r)] +
[C/(1+r)^2]+ [C/(1+r)^n]

C = coupon payment 
n = number of payments 
i = interest rate, or required yield 
M = value at maturity, or par value

Question 11

Calculate future value

Answer 11

PV(1+i)^n

Question 12

List the different types of risks that can be encountered while trading.

Answer 12

Default risk

Price risk

Foreign exchange risk

Tax and regulation risk

Question 13

List the different types of investments:

Answer 13

1. Bank & building society accounts
   A building society is a mutual institution. This means that most people who have a savings account, or mortgage, are members and have certain rights to vote and receive information, as well as to attend and speak at meetings.
   Banks are companies (normally listed on the stock market) and are therefore owned by, and run for, their shareholders.
2. Money market deposits
   A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.
3. Government stocks (gilts)
4. Local authority stocks
5. Certificates of deposits
   Low-risk and relatively low-return — investments suitable for cash you don’t need for months or years.
6. Shares of listed companies

Question 14

Define forfaiting

Answer 14

The purchasing of an exporter’s receivables (the amount importers owe the exporter) at a discount by paying cash.
The forfaiter, the purchaser of the receivables, becomes the entity to whom the importer is obliged to pay its debt.

Question 15

List the different types of investments:

Answer 15

1. Bank & building society accounts
   A building society is a mutual institution. This means that most people who have a savings account, or mortgage, are members and have certain rights to vote and receive information, as well as to attend and speak at meetings.
   Banks are companies (normally listed on the stock market) and are therefore owned by, and run for, their shareholders.
2. Money market deposits
   A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.
3. Government stocks (gilts)
4. Local authority stocks
5. Certificates of deposits
   Low-risk and relatively low-return — investments suitable for cash you don’t need for months or years.
6. Shares of listed companies

Question 16

Define forfaiting

Answer 16

The purchasing of an exporter’s receivables (the amount importers owe the exporter) at a discount by paying cash.
The forfaiter, the purchaser of the receivables, becomes the entity to whom the importer is obliged to pay its debt.

Question 17

What factors must be considered when investing short term?

Answer 17

1. Liquidity
2. Risk
3. Return
4. Term to maturity