Ch.11 ST investing and borrowing

Question 1

Key elements to a short term investment policy

Answer 1

• Investment objectives
• Permissible classes of investments
• acceptable security ratings

Question 2

What are the basic short term investment strategies available to an organization?

Answer 2

• Passive strategy (buy and hold)
• Aggressive, looking for higher rate of return
• Taxed based, looking for tax benefits

Question 3

What is a yield curve

Answer 3

• plot of yields to maturity on the same investment instrument

Question 4

Yield on a short-term investment is a function of what three factors?

Answer 4

1. Cash flows received from the investment
2. Amount paid for that investment
3. Maturity or holding period.

Question 5

Name the principal types of short-term funding available to most companies.

Answer 5

• Trade Credit, stretching vendors
• Internal Borrowing, intercompany loans
• Selling Receivables, factoring
• Commercial Bank Credit, Loan syndicates and Lines of credit

Question 6

What are the costs typically involved with a line of credit?

Answer 6

• All-in rate of interest
• Commitment fees, used and unused balances
• Compensating balances

Question 7

What are the basic components of interest rates for borrowing?

Answer 7

r = r*RF + IP + DP + LP + MP

Question 8

What are loan covenants?

Answer 8

Restrictions and/or obligations on the part of the organization’s managment

• Ability to sell certain assets
• Right of an organization to issue additional bonds
• Use of second or junior mortgages
• Key ratios that limit flexibility
• Payment of dividends

Question 9

What are the two major classes of credit ratings?

Answer 9

Issuer Credit Ratings: Opinion of the obligors overall capacity to meet its financial obligations.
Issue-Specific Credit Ratings: Rating of specific LT and ST securities consider the attributes of the issuer.