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Exam > Exam 3 - Section I General > Flashcards

Exam 3 - Section I General Flashcards

1
Q

What does the prompt payment act of 1982 require?

A
  • Bills must be paid within 30 days of a proper invoice
  • Discounts must be taken when they make sense
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2
Q

What all needs to be included in a proper invoice?

A
  • quantity of items
  • Price per item
  • Amount due
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3
Q

What happens if payments are not paid timely?

A

The government must pay interest. And if interest is not paid, the government must pay double interest.

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4
Q

What does the cash management improvement act of 1990 require?

A

Payments must be fast

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5
Q

What does the 31 CFR part 208: management of federal agency dispersements require?

A

Requires federal agencies to use ETF

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6
Q

What is the best cash internal control?

A

Separation of duties
Note: having a receivable on the books is the strongest control also

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7
Q

What three duties should be broken up when handling cash (separation of duties)?

A
  1. Handling cash/checks.
  2. Keeping the books
  3. Bank reconciliation (best of done by an outside party)
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8
Q

When our checks mostly used? What are some safeguards when using checks?

A
  • mostly used for one time transactions and big amounts
  1. Prenumbered checks.
  2. Safe storage.
  3. Limited signers
  4. Frequent reconciliation.
  5. Safeguard or destroy canceled checks.
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9
Q

What are some ways to detect, diverted cash when collecting cash for receivables?

A
  1. Reviewing aged collection reports.
  2. Review each dispersements and vendor reports.
  3. Compare cash, received and disbursed to the budget and expected amounts.
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10
Q

Who is in charge of the federal reserve bank?

A

A board of governors who presidentially appointed and senate confirmed

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11
Q

How many federal reserve banks are there?

A

12

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12
Q

Who does the federal government use as their bank?

A

The department of treasury who uses the federal reserve system

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13
Q

What are the roles of the federal reserve?

A
  1. Manage monetary policy for our economic benefit.
  2. Operate ACH check operations.
  3. Distribute coin/currency.
  4. Do physical agency functions for Treasury and other agencies.
  5. Serve as a federal government bank.
  6. Give short term loans to banks, determining interest rates.
  7. Make certain loans.
  8. Supervise bank, holding companies and provide consumer protection information.
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14
Q

What types of information should be included when state and local governments issued RFPs asking banks for proposals?

A
  • can the government use a foreign bank?
  • Where is the bank?
  • Is it too big small or just right?
  • can the bank handle collateralization requirements
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15
Q

What are some services the banks can offer state and local governments?

A
  1. Collection services (collecting bills, processing checks, lockbox, excepting ETF payments)
  2. Concentration bank services
  3. Zero balance accounts
  4. Payment services.
  5. Short term borrowing.
  6. Underwrite bonds.
  7. Investment advice.
  8. Credit cards
  9. Accounting services.
  10. Safety deposit boxes.
  11. Information reporting services.
  12. Bank account analysis.
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16
Q

What are ways governments can pay for banking services?

A
  1. Paying a fee.
  2. Compensating balances.
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17
Q

What is a compensating balance, and who gets the interest on unused funds?

A

Maintaining a minimum balance at a deposit bank

The bank earns the interest on the unused fun

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18
Q

Why is cash forecasting/budgeting important?

A

Cash is collected at certain periods during the year, but paid a different times throughout the year.

Cash budgeting makes payments available when needed, and allows the rest to be invested

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19
Q

What are some bank collection systems?

A
  1. Check/cash deposit.
  2. Lockbox services.
  3. Concentration bank system.
  4. Over the counter collections.
  5. Credit/debit cards.
  6. Electronic collections.
  7. Prepaid drawdown accounts.
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20
Q

Explain the cash/check deposit process

A
  1. Government send tax bill
  2. Taxpayer mails or carries check to government.
  3. Collection is recorded.
  4. Check/cash deposited into bank and credited to government.
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21
Q

What are some advantages of using lockbox services?

A
  1. Deposits are made same day.
  2. Bank employees handle cash instead of government employees
  3. Separation of duties - cash and check handling is separate from books
  4. The bank provides daily records to the government of who paid and the amount.
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22
Q

What is a bank concentration system?

A

A bank is selected in the capital city with branches throughout the state.

Local offices deposit money into local branches.

The Capital City Bank sweeps local branch balances each night, then transfer the money into the state account

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23
Q

How are concentration, bank system different from ZBAs?

A

ZBAs ate used for payroll checks

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24
Q

What is a ZBA? Explain its process.

A
  1. An operating bank is designated as central clearing bank for all transactions
  2. Individual ZBAs are created to serve as dispersement and depository accounts
  3. Close of business day ZBAs are automatically transferred to operating bank account
  4. ZBA is close to zero.
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25
Q

Delete

A

Bank collect payments (utility, tax bill)

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26
Q

What are prepaid drawdown accounts? What is an example?

A

A consumer required to deposit money into an account is drawn against as a consumer buys goods/services

Ex: EZ Pass

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27
Q

What are some types of government disbursements?

A
  1. warrants/checks
  2. Electronic payments.
  3. Automatic debit, and credit payments.
  4. Reoccurring payments.
  5. Electronic data interchange.
  6. Credit cards.
  7. Electronic benefit cards.
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28
Q

What is a warrant? How is it different than a check?

A

An instrument drawn on the treasury of a government

A check is an instrument drawn on a bank and paid with funds on deposit

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29
Q

When are electronic payments used?

A

Large numbers of recipients and/or the payment amounts are reoccurring

It’s not good for one time payment

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30
Q

What are some advantages for paying electronically?

A
  1. Low cost.
  2. Lower control risks.
  3. Reduces lost or stolen checks that need to be issued.
  4. Ability to authorize and warehouse approved payments, and assure that payments are made under the desired date.
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31
Q

What are the two types of electronic payment?

A
  1. Wires.
  2. Electronic fund transfer’s (ETF) through the automated clearinghouse (ACH) system
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32
Q

What is the federal reserve wire system called?

A

FedWire

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33
Q

When are wire transfers appropriate?

A

When there’s high dollar amounts because wires are expensive

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34
Q

When are EFT payments appropriate?

A

Large number of payments made
Only cost a few cents

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35
Q

What are some ways agencies can deter identify incorrect improper payments from electronic payments?

A
  1. Edit checks (identifying dispersements that significantly exceed the norm for the type of payment involved)
  2. Data mining (identifying disbursements in the same amount to the same vendor within a given period of time to discover potential duplicate payment)
  3. Audit checks (amount did not exceed the maximum per contract.)
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36
Q

When are automatic debit/credit payments made?

A

Payroll taxes to the federal government.

  • Arrange it with one of the governments banks to have an automatic withdrawal from its account on an individual or reoccurring basis of a specified amount, and have it credited to the designated parties bank account
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37
Q

What are reoccurring payments? When are they often used?

A
  • customers billed electronically followed by an automatic withdrawal from the customers bank account
  • Used for utility bills or phone company
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38
Q

What is an electronic data interchange (EDI)?

A

Transfer money and remittance information through ACH systems to the payee.

Computer to computer transmission of business information in a standardized format

An addendum record contains payment related account information which is transmitted along with actual payment

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39
Q

What are some advantages of using credit cards?

A

Government can make single large payment to credit card company rather than small payments to the individual companies were the card was used
- Provides greater efficiency and lower cost
- mapping the banks, payment information (line item details of purchases) can be mapped to the government accounting system to reduce manual accounting entries

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40
Q

What are electronic benefit cards? What are some example of how they are used?

A
  • Smart card, that stores a prepaid limit for a type of benefit the holder is entitled to
  • food stamps, Medicaid program, SSI 
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41
Q

What are some advantages of electronic benefit cards?

A
  • Efficient way to distribute and pay for different types of benefits
  • Reduce fraud
  • Limit types of purchases that can be made
  • Eliminate lost and stolen checks
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42
Q

What are cash discounts? When should they be taken?

A
  • offer to customers to pay invoice early
  • Should generally be taken (required by the prompt payment act to be taken when offered)
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43
Q

What does 1/10, net 30 mean?

A

Customer can deduct 1% from the amount to be paid if he pays within 10 days.

If he does, not, he must pay the full amount within 30 days

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44
Q

When should cash discounts be taken according to the prompt payment act?

A
  1. If discount is economically justified
  2. Payment can be made within discount.
    — discount must be compared to treasury rate to determine if it’s in the best interest of the government
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45
Q

What should the government do if it does not have the cash to pay a bill soon enough to obtain the discount?

A

It should consider borrowing the money if the terms are favorable

  • Percent reduction in the amount to be paid for the number of days between the date. The bill has to be paid team the cash discount and the date the bill Hass to be paid in full. This number is typically less than 365 days in a year does the percentage is typically far greater than the percent that would’ve been charged for borrowing the funds.
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46
Q

What are some types of payments?

A
  1. Proper.
  2. Improper
  3. Unknown.
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47
Q

What is an improper payment? What are some causes of improper payments?

A

Payment made in an incorrect amount, under statutory, contractual, administrative, or other legally applicable requirements

  1. Payment to ineligible recipient
  2. In eligible good/service.
  3. Duplicate payment.
  4. Good/service not received except authorized by law.
  5. Payment not authorized by law.
  6. Payment that does not account for credit for applicable discounts.
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48
Q

What are the two components (types) of improper payments?

A
  1. Improper payments that result in a monetary loss to the government
  2. Improper payments that do not result in a monetary loss to the government.
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49
Q

When is there a monetary loss to the government when an improper payment is made?

A

Payments are made to the wrong recipient and/or in the wrong amount

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50
Q

When do you improper payments not result in a monetary loss to the government?

A
  1. Under payments and
  2. payments made the right recipient for the right amount, but the payment was not made in strict accordance with statute for regulation
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51
Q

What are unknown payments?

A

Payments that could either be proper or improper, but there’s insufficient or lack of documentation to discern

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52
Q

What is some legislation against improper payments?

A
  1. Improper Payments Information Act of 2002
  2. Improper Payments Elimination and Recovery Act of 2010 (IPERA)
  3. Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA)
  4. Executive orders.
  5. Presidential memoranda.
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53
Q

What‘as approach OMB Mémorandum M-21-19 for an improper payment program?

A
  1. Prepare a risk assessment, at least every three years for every program over 10 million and submit the assessment to OMB.
  2. Determined improper payment estimate for identified susceptible payments using a statistically, valid sampling end estimation methodology plan submitted to OMB.
  3. Develop an implement a corrective action plan to reduce improper payments.
  4. Identify whether there are statutory or regulatory barriers, that limit implementation of the plan and seek their elimination or modification.
  5. Report improper an unknown payments on www.paymentaccuracy.gov as required.
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54
Q

What is the focus of a risk assessment?

A
  • Identify whether the program is likely or unlikely to have improper payment above define statutory threshold
  • Focus on programs with large and proper payments
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55
Q

What factors should be included in the risk assessment of a program?

A
  1. Newness and complexity of the program.
  2. Volume of payments.
  3. Whether payment eligibility or amount decisions are made within or outside of the agency.
  4. Level, experience and quality of training for the persons working in the program.
  5. Prior deficiencies.
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56
Q

What should the corrective action plan to reduce improper payments include?

A
  1. Identification of the root causes of improper payments
  2. Determination of whether internal controls are adequate and how to strengthen them if not.
    New technologies and techniques, such as forecasting tools, pre-payment, software and data matching
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57
Q

What are the three basic categories of activities to reduce improper payments?

A
  1. Prevention activities.
  2. Detection activities.
  3. Recapture activities.
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58
Q

What are prevention activities and examples?

A
  • Proactive activities that prevent improper payments from occurring
  • Examples: pre-payment reviews, due diligence, predictive modeling
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59
Q

What are detection activities and examples?

A
  • Detect improper payments that may have occurred
  • Examples: payment verification, data, matching, and forensic tools to isolate payment patterns or anomalies
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60
Q

What are recapture activities?

A

Recovering improper payments

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61
Q

What is Do Not Pay program and who established it?

A
  • program that makes data files available so agencies can determine if there are red flags indicating the payment should not be made
  • Established by Department of Treasury
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62
Q

What are some examples of Do Not Pay databases?

A
  1. GSA Excluded Parties List
  2. Designated Nationals List (terrorist)
  3. SSA Death Master File
  4. HHS OIG list of individual/persons excluded from federal healthcare programs
  5. Treasury’s delinquent debt list.
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63
Q

When can the Do Not Pay program be used by the states?

A

When states administer federal payments

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64
Q

What are two reasons the government has cash available?

A
  1. Cash from taxes and other sources I received periodically but payouts for salaries and other payments are paid evenly throughout the year.
  2. Contributions to pension plans, endowment funds, and other fiduciary activities are frequently received, but obligations are not until the future.
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65
Q

What are the three key elements to investing?

A
  1. Safety/risk (the avoidance of risk)
  2. Liquidity.
  3. Yield
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66
Q

What are some types of investing risk?

A
  1. Credit/default risk.
  2. Custodial risk.
  3. Market risk.
  4. Interest rate risk.
  5. Currency risk.
  6. Political risk.
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67
Q

What is credit risk?

A

The rest the investment will not be paid back.

It occurs when a bond issuer does not repay the bond immaturity or defaults on the interest payments.

Also, government holds equity shares in a corporation that declares bankruptcy

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68
Q

How can credit risk be reduced?

A
  1. Consider bond ratings (Highly rated bonds are least risky well low rated/junk bonds are riskiest)
  2. Diversification
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69
Q

When is custodial risk, at least, and at its greatest?

A

Least: securities are registered in the owners name, and hold them directly or through an agent of the owner

Greatest: securities are uninsured and not registered in the owners name, but in the counter party, or it’s agents name, and held by a counter party or the counter parties trust department or agent

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70
Q

What is market risk?

A

Risk that investments will lose money based on the daily fluctuations of the market

Example: stock prices fluctuate based on company, performance, economic factors, national and international news

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71
Q

What is interest rate risk?

A

A type of market risk

The risk that fixed income securities value will change due to an adjustment in interest rates. If the government needs to sell the security to obtain cash, it could lose money.

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72
Q

How do interest rates affect the value of fixed income securities?

A

When interest rates rise, the value of fixed income securities fall

When interest rates drop, fixed income securities increase

Example: a bond with an interest rate of 8% and purchased at Par (face value) will sell for less than face value on the market, if the interest rate on other bonds climb to 10%

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73
Q

Which type of Securities are subject to interest rate risk?

A

Long-term securities

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74
Q

What is currency risk?

A

Investments purchased and sold in none dollar currencies that fluctuate against the dollar

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75
Q

What is political risk?

A

Investments, particularly international investments, that may be adversely affected by nationalization, taxation, war, government, instability, or other economic/political actions/factors

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76
Q

What is liquidity?

A

The ease in which financial assets can be converted to cash without suffering from change in price/value

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77
Q

What are the most liquid assets?

A
  1. Money market funds
  2. Interest-bearing checking accounts
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78
Q

What is yield/return and how is it expressed?

A

The dividend or interest paid by a company expressed as a percentage of the current price

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79
Q

What is the return on the stock that has a current market value of $40 a share paying dividends at a rate of $3.20 a year?

A

8%

80
Q

What is yield to maturity and how is it calculated?

A
  • The total return received on a bond, note, or other fixed income security, if the investment is bought and held to its maturity date
  • YTM is based on the coupon rate, length of time to maturity, and market price
    -It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate

YTM =
C + (FV - PV/t) divided by (FV + PV)2

Where:
C - Interest/coupon payment|
FV - Face value of the security
PV - Present value/price of the security
t- How many years it takes the security to reach maturity

81
Q

How is total return measured?

A

A measure of performance that takes into account all three components of an investment performance— income, capital gains, and Price appreciation overtime

82
Q

What is the risk versus return relationship?

A

The higher the return, the more risk has to be in less liquidity available
** governments choose safety and liquidity over return

83
Q

What are some types of investment instruments?

A
  1. Fixed income securities (ST or LT)
  2. Equity securities
  3. Mutual funds.
  4. International securities.
  5. Alternative investments.
  6. Other investments.
84
Q

What are some types of short term fixed income securities?

A
  1. US government treasury bills (T bills)
  2. Certificates of deposit (CDs)
  3. Unsecured short term promissory notes (commercial paper)
  4. Bankers acceptances
  5. Re-purchase agreement (repos)
  6. Short term mutual funds
  7. Short term investment funds (STIF)
85
Q

What are treasury bills (T-bills)?

A
  • Delegation of the US treasury that have maturities of one year or less
  • Offered at a discount and paid face value at maturity
  • Safest investment because backed by “full faith and credit” of US government
86
Q

What are certificates of deposit (CDs)?

A
  • issued by Banks and other financial institutions
  • Pay a fixed rate of interest for specific period of time with early withdrawal penalty
  • Insured by FDIC up to $250,000 if bank is insured
87
Q

What are unsecured short term promissory notes (commercial paper)?

A
  • Used by companies to obtain cash
  • Corporations, with excellent credit rating dominate the market
  • Maturity is typically less than 270 days (commonly 30 to 50 days)
  • stable, liquid investment
88
Q

What are bankers acceptances?

A
  • drafts John by corporate borrowers
  • Guaranteed 4 feet by Banks to raise money against future production/sale of goods
  • mature in 90 days or less, and sold at a discount to mature at Par
  • Generally not used by government as much as other short term fixed income investments
89
Q

What are short term mutual funds? Who were they regulated by?

A
  • Pools of money with other investors with similar investment objectives
  • Regulated by the Investment Company Act of 1940
  • Vary substantially in terms of types of investment, their sales charges, and their management fees
90
Q

What are the benefits of short term mutual funds?

A
  • continuous professional management
  • Diversification
  • Ownership of different Security’s to help spread the risk
  • Automatic reinvestment of earnings
  • Ready liquidity
91
Q

What are short term investment funds (STIF)/pooled short term investments?

A

The short term cash of many entities are commingled in the pool
- A portion of the pool is available to invest for longer periods of time
- Maturities are laddered with cash becoming available each day to meet forecasted cash needs

92
Q

What are some types of long term fixed income securities?

A
  1. Bonds
  2. Debentures/debt certificates
  3. Zero coupon bonds
  4. STRIPS (Separate Trading of Registered Interest and Principal of Securities)
93
Q

What are bonds?

A
  • Certificate issued by corporations or governments
  • Issuer promises to pay the bond holder, a specific amount of interest for a specific length of time
  • The loan is repaid on maturity date
  • The assets of a corporation or pledged as security for the loan
  • Bondholders can claim company assets before stakeholders if company is liquidated
94
Q

What is debenture?

A
  • Debt certificate
  • backed only by the general credit of the issuer, not it’s assets
  • Pays higher interest rate
95
Q

What are zero coupon bond?

A
  • Fixed income securities that do not make interest payments each year like a regular bonds
  • Bonds are sold at a deep discount to its face value
  • Bondholder collects the bonds face value at maturity
  • The difference between the discounted price, and the face value is equivalent to the interest the bond holder would’ve received
  • Sensitive to interest rate risk
96
Q

What are STRIPS (separate trading of registered interest and principal of Securities)?

A
  • Book entry system operated by the federal reserve permitting, separate trading and ownership of the principle and coupon portions of selected treasury securities
  • Creates zero coupon treasury securities from designated whole bonds
97
Q

What are stocks?

A
  • Ownership interest in a corporation
  • Higher rates of return
  • Volatile over short period of time
  • Should only be made with funds that are to be invested for the long term
98
Q

What are mutual funds?

A

Investing in a number of different companies or sectors

99
Q

What are stock funds?

A

Focused on specific types of equity investments, such as small or large, capitalize companies, companies in a financial services, sector, or health services Sector, growth funds, international funds.

100
Q

What are index funds?

A
  • Funds that attempt to match the performance of a particular index
  • The objective is to mirror and index not try to beat it
  • Manage passively
  • Load management fee
101
Q

What is essential when investing in international securities?

A
  • Competent investment managers, who know about international investing
  • Custodial financial institution with a worldwide net work of subs custodians
  • Multi currency accounting capability
102
Q

What are some ways that international exposure can be achieved?

A
  1. Investing in International, mutual or index funds.
  2. Purchasing international securities, such as American Depositary Receipts (ADRs) or Yankee bonds traded on US exchanges
103
Q

What are American Depositary Receipts (ADRs)?

A
  • Negotiable, registered securities issued in the US market and or evidence of title to non-US investments
  • Registered with the SEC
  • Quoted in US dollars
  • Holders Enjoy the same ownership in membership writes a shareholders.
104
Q

What are Yankee bonds?

A

Foreign bond denominated in US dollar in issued in the United States by foreign banks and corporations
- Usually registered with the SEC

105
Q

What are alternative investments? When are they appropriate?

A
  • Vehicles such as private equity/venture capital, real estate, real estate investment trust (REIT), hedge funds)
  • Appropriate only for entities that I can afford a small loss in order to have the opportunity for a sizable return (large pension and endowment funds)
106
Q

What is private equity/venture capital? What does it include?

A
  • money provided by investors to properly held companies with perceived, long-term growth
  • May include:
    1 buyout/takeover investing (direct purchase of companies with potential)
    2. Mezzanine investing (Lenny money above the amount loan by the financial institutions)
    3. Fund of fund investing (investing in a find the invest in multiple venture capital funds)
    4. Investment of secondary holdings (private equity sold on secondary markets)
107
Q

How are private equity firms funded?

A

Private equity firms are limited partnerships, funded by private and public pension, funds, endowment, funds, foundations, corporations, wealthy, individuals, foreign investors, and venture capitalist

108
Q

What are the risks/rewards of private equity/venture capital investing?

A

Mini private equity/venture capitalist, do not make it financially
- Very profitable if they do make it

109
Q

How can real estate be purchased?

A
  • As individual holdings
  • Open end or close end trusts
  • Limited partnerships
110
Q

What is a real estate investment trust (REIT)?

A

A corporation or trust that uses the pool capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT)
- traded on major stock exchanges
- More liquid then real estate

111
Q

What are hedge funds?

A
  • Similar to mutual funds, except find manager is authorized to invest in derivatives, and borrow to provide a higher return
  • Riskier investment but fund can use hedging strategies to protect against downside risk
112
Q

What are derivatives?

A
  • Financial instruments traded on or off and exchange
  • The price is directly dependent on (derived from) the value of traditional security, asset, or market index
  • Trading of rights or obligations based on the underlined product, but are not directly property transferred
113
Q

What are some types of derivatives?

A
  • Futures contracts
  • Foreign exchange contracts
  • Ford contracts
  • Interest rate swaps
  • Options
114
Q

What are some positives and negatives of derivatives?

A
  • Very risky
  • Can we use to alleviate risk (the owner of an international investment faces, the normal market risk and currency risk— purchasing of currency futures at that price can hedge the currency risk)
115
Q

What are interest rate swaps?

A

In agreement between two parties to swap interest rate exposures from today obligation that have different payment streams
- One is usually a floating interest rate in the other a fixed interest rate
- No exchange of principal/ownership
- Only interest cash flows (payment/receipts) are exchanged

116
Q

What are some investment goals/objectives?

A
  • current income
  • Growth of capital
  • Growth of capital and income
  • Preserving capital
117
Q

What are the four main methods of diversification?

A
  1. Type of investment/asset allocation.
  2. Sectors (different sectors of the comedy, such as financial services/oil and gas/manufacturing)
  3. Companies (spreading investments among companies in a sector)
  4. Countries (attaining global exposure)
118
Q

What is the foundation/key determinant of investment portfolio success?

A

Diversification

They provide maximum investment returns given a predetermined acceptable degree of instrument risk over a given time horizon

119
Q

Who decides to make an investment in small governments?

A

Director of Finance or Controller

120
Q

What is the prudent person role?

A

Those with responsibility to invest money for other, should act with a prudence, discretion, intelligent, and regard for the safety of capital as well as income.

121
Q

What is the prudent expert standard/prudent investor rule?

A
  • It’s a revised version of the prudent person rule
  • Requires that a fiduciary investor must act as someone with familiarity in matters relating to the management of money not just prudence
  • Those responsible for selecting and monitoring investment must know what they’re doing. It must do it slowly in the interest of the participants and beneficiaries (without conflicts of interest)
122
Q

Who mostly manages government investments?

A

Professional money managers

123
Q

How are money managers selected?

A

The normal procurement process:
- Request for proposal issued specifying an amount of money to be managed in the type of investment to be used
- Proposals are evaluated based on factors (money managers proposed investment approach; their organization, style, consistency, background, prior, and references; returns the state will be obtained)
-

124
Q

How are money managers monitored and evaluated?

A
  • Monitor through written reports and face-to-face meetings
  • Evaluated based on their performance (whether they’re achieving the expected rate of return)
    ** they can be terminated/replaced, if not performing as expected
125
Q

Who are brokers and what can they specialize in?

A
  • brokers arrange for the purchase/sale of investments
  • They were selected based on who is able to execute the transaction with the least commission cost
  • specialize in:
  • Large blocks of Security’s
  • Small capitalize Security’s
  • International securities
126
Q

What are market exchanges? What is the most known American exchange?

A
  • The facilitate the sale/purchase of Securities
  • The NYSE (an auction market)
127
Q

What is an over the counter (OTC) sale?

A
  • A market for securities not listed on an exchange
  • A negotiated market in which Security orders are transacted be a telephone in a computer networks that connect dealers
  • OTC dealers may act as either principles or agents for customers
128
Q

What is NASDAQ?

A

An automated computerized information system that facilitates trading and provides brokers, dealers, and other price quotations on securities, trade it over the counter

129
Q

What is the Depository Trust System (DTC) system?

A

A central repository through which members electronically settle trades in corporate, mortgage-backed and municipal securities, and electronically transfer the security certificates
** trades used to be physical exchanges of actual certificates

130
Q

How many days after purchase/sale do current regulations provide for an exchange?

A

Three days after purchase/sale

131
Q

What are the minimum requirements for a fiduciary investment policy manual?

A
  1. Emphasis of prudent principal rule
  2. Investment objectives for the different types of funds (short term cash available, pension, endowment, and other long-term funds) and the processing for selecting, monitoring any value investment of each type— including the expected, returns and/or growth
  3. The considerations and guidelines to be used to select investments (I eat diversification)
  4. Required collateral, particularly for short term investments. You should also include requirement that the collateral we held at an independent third-party institution, and then to be marked to market frequently based on the degree to watch the subject to volatility swings.
  5. Required reporting and evaluation of investments
  6. Benchmarks
  7. Permissible investments
    8.
132
Q

What are the most important investment controls?

A
  1. Comprehensive investment policy manual (most important)
  2. Clear delineation of the investment function (clear roles and responsibilities of investment activity especially authorizing and improving investment transactions)
  3. The individuals responsible must be educated, trained, and bonded
  4. Annual financial audit to review correct value of investments and income and investments compliance with written investment policies
133
Q

What does the Statement on Standards for Attestation Engagements (SSAE) 18 require?

A

Auditors should determine whether institutions controls can be relied on

134
Q

What investment function should be segregated?

A
  1. Authorizing
  2. Approving
  3. Recording
  4. Reporting
135
Q

What are some types of equity securities?

A
  1. Stocks
  2. Mutual funds
  3. Index funds.
136
Q

What is arbitrage?

A

a trading strategy that involves buying an asset in one market and selling it in another market at a higher price to profit from a temporary price difference

Governments have arbitrage restrictions on how much interest they can earn

137
Q

How many loans does the US government have outstanding?

A

$1 trillion of loans

138
Q

What are some ways governments can become creditors?

A
  1. Direct lending.
  2. Extending credit to purchases of government good/services, overpay person/organization for one reason or another, or finding persons/organizations for violating a law/regulation
  3. Failure of taxpayers to pay their taxes.
139
Q

What are direct loans?

A
  • The government agency disperses funds directly to a borrower and is repaid directly by that borrower
  • A direct relationship between the government agency and the borrower
  • A cosigner may be required
140
Q

What is the process for direct loans?

A
  1. Applicant applies to the agency and provides the information required by the program.
  2. The agency processes the application.
  3. The loan is approved if the applicant meets the program requirements.
141
Q

Who are the three parties in loan guarantees?

A
  1. The applicant.
  2. The lending institution in the private sector, such as a bank.
  3. The government.
142
Q

What is the loan guarantee process?

A
  1. Applicant applies to a lending institution that has agreed to participate in the loan guarantee program.
  2. The institution processes, the application, using criteria established by the government agency.
  3. Loan is approved if applicant meets the requirements.
143
Q

Who are guaranteed loan payments made to? What happens if the borrower fails to make the required payment?

A
  • directly to the institution
  • If the borrower fails to make the required payments, the institution contacts the government agency. The agency will then make payment to the institution.
144
Q

What are extensions of credit?

A
  • an extension of the payment period or otherwise restructure of the payment schedule.
  • Occurs when the government works with individuals/organizations who have financial difficulty and are not able to make the required payments for sale of goods/services on credit
145
Q

How are delinquent taxes recorded?

A

Receivables (from tax payers)

Example: an individual can’t pay property taxes in the required time, and the government may decide against foreclosing the home and provide the taxpayer the opportunity to restructure the debt and pay the obligation overtime

146
Q

What are some objectives for the government making loans and guaranteed loans?

A
  1. Social and economic purposes
  2. those deemed extremely important to the economy that are facing eminent, financial collapse
  3. Providing working capital financing for defense contractors to enable contractors to provide essential equipment.

Example: college students, tuition, bills, maintaining strong, agricultural, stimulate small businesses, support, manufactured goods, help those affected by natural disasters

Example: GM, AIG, Bank of America, Lockey corporation

147
Q

What are the difference between private sector lending institutions and the government?

A
  • Governments are not trying to profit from the loan programs
  • governments lend at no interest or below market interest rates
  • government loans can be given if certain conditions are met (healthcare students agree to serving in country lacking adequate medical care)
  • Credit is often extended to individuals and organizations, who, because they lack the expected qualifications cannot obtain credit from other sources (government is lender of last resort)
148
Q

What are the restrictions with direct loan and loan guarantee programs in the government?

A

Agencies may not make loans or guarantees for purposes, or on the terms that are not authorized by legislation
- Actions must be authorized by legislation
- For every direct loan and loan guarantee program, there must be authorizing legislation

149
Q

What does legislation typically set forth for direct loan and loan guarantee programs?

A
  1. Public purpose of the program.
  2. Eligibility requirements for obtaining the loan or guarantee.
  3. Maximum amount that can be lent.
  4. For which the loan can be made
  5. The interest rate.
  6. Procedures for obtaining the loan or guarantee.
150
Q

What policy defines requirements for managing a federal credit program?

A

OMB Circular A-129, Policies for Federal Credit Programs and Non Tax Receivables

151
Q

What positions are in credit programs?

A
  1. Program managers
  2. Financial managers.
152
Q

What do program management do?

A

Make credit available as defined by legislation/regulation in order to pursue the programs objectives

153
Q

What does financial management do?

A

Support program management by processing the financial transactions and providing financial reports

154
Q

What are some activities typically conducted by program personnel?

A
  1. Choosing who is eligible for credit extension (general eligibility requirements are in legislation; agencies specific criteria for applicants)
  2. Defining the amount of credit to be extended. (Maximum amount is in legislation; agency can grant credit for amount less than max)
  3. Establishing the terms/conditions (legislation sets general terms/conditions such as max term for loan or guarantee , interest rates; agencies establish detailed requirements)
  4. Negotiating out arrangements for borrowers, unable to make scheduled payments. this should be done by someone different than who made the loans and established the terms/conditions
155
Q

What are the principal credit management related activities of financial management?

A
  1. Budget oversight. (specify, max amount of credit that can be extended for the program and assuring that limit not breached)
  2. Reporting to credit bureau – includes both the extension loan, and any difficulties in obtaining repayments
  3. Establishing an accounting record for each borrower.
  4. Promptly recording and depositing the borrowers payments
  5. Monitoring repayments to assure they remain current and notifying program management of borrowers slippages
  6. Reporting on the condition of the loans.
  7. Initiating collection activities for delinquencies.
  8. dealing with uncollectible loans loan guarantees
156
Q

What components should a well-managed credit program include?

A
  1. Credit extension. (deciding who may be granted credit, and how much)
  2. Account servicing (receiving inciting payments, and monitoring the debtors performance)
  3. Debt collections. (turning bad credit into good)
  4. Close out. (Terminating the relationship)
  5. Program monitoring. (assessing whether the program is meeting its objectives, and how it is operating otherwise)
157
Q

What should be done when extending credit?

A
  • determine eligibility
  • Evaluating for creditworthiness
  • Other credit extension steps
  • Documentation
158
Q

What should be done to determine eligibility for extending credit?

A

Determine whether to extend credit by examining the laws and regulations establishing the credit program

Criteria determines who is eligible

159
Q

What are some examples of eligibility of extending credit?

A
  • Amount of income
  • amount of assets
  • size of a business
  • criteria related to the purpose of the program (the credit to help veterans by Home if they are enrolled in an accredited college)
160
Q

Who establishes procedures by which potential recipients may apply for credit and determined whether the recipients meet the criteria?

A

The program management

However, the nature and level of proof of eligibility might be defined and legislation or regulation, or might be a program management decision

161
Q

What does step should be taken to evaluate creditworthiness?

A
  • determining whether the applicant is delinquent on any other government credit or tax debt (may automatically be ineligible for receiving your loan or guarantee)
  • The likelihood that the applicant or repay
    the loan according to the terms
162
Q

What are the four factors in the traditional approach to credit evaluation?

A
  1. Character - demonstrated willingness of the applicant to use credit responsibility.
  2. Capacity - financial ability of the applicant to meet the terms of the credit usually indicated by cash flow relative to the credit
  3. Collateral - availability of the assets claim if the borrower (if is to finance an asset, loan to value ratio must be equal or greater than 100%)
  4. Capital - the amount of skin in the proper or activity of financed by the loan.
163
Q

What is required if the applicant can’t meet the four Cs?

A

A co-signer

164
Q

What can’t creditors do unless the terms are established into law?

A

They have flexibility to fit the terms of the credit to the applicant situation by addressing the interest rates, maturity dates, or payment schedules

Interest rates to be charged on a loan, or the interest supplement to a guaranteed loan. Lender should be specified by reference to a market rate or treasury, Security, rather than an absolute amount.

165
Q

What are some steps during credit extension?

A
  • seeking a fee, to the extent permitted by statute, for processing the credit application, and extending the credit
  • establishing covenants and restrictions, they will protect the governments interest. An example would be prohibiting persons obtaining alone to build multifamily residences from using the funds to build their riskier commercial properties.
  • assuring that the government claims are not subordinated to the claims of other creditors
  • Assuring that the economic life of any asset, financed with the loan is longer than the loan maturity
  • for guaranteed loans, assuring that the lender also has a steak in the transaction, for example, if only 75% of the loan is guaranteed, the lender would be more diligent seeking repayments than if the creditor is 100% guaranteed by the government.
166
Q

How much does OMB circular a 129 require institutions making guarantee loans to bear for the risk of loss?

A

Institutions making guarantee loans there at least 20% of the risk of loss, unless program  legislation dictates otherwise

167
Q

What information should be contained in a file needed to manage the loan receivable and a credit extension?

A
  • customer name
  • Customer ID number
  • Customer type (federal agency, state/local government, commercial entity, individual, employee)
  • SSN or TIN
  • Customer address
  • Contact names
  • Contact telephone numbers
  • Federal versus non-federal indicator (for federal agencies)
  • Six digit trading partner codes (for federal agencies, if applicable)
  • ALC number (for federal customers)
  • DUNS number (RMA-01)
168
Q

What other information is included in the credit extension file?

A
  • loan application
  • Credit bureau reports
  • Credit analysis
  • Loan contracts
  • Collateral appraisals
  • All other papers associated with extending the credit
169
Q

Who should be involved with account servicing?

A

Account servicing should be a joint effort of the program staff and the finance office, particularly since many government lending programs operate with hands-on involvement of program managers

Example: department of agriculture are the program managers in the field, who extend credit for farm ownership/operation. They visit farms to evaluate progress, and give advice to our borrowers.

170
Q

What should an account include?

A
  • Personal information obtained during the credit extension phase
  • information about the credit in order that the debt performance can be monitored
  • Account number
  • Amount of original credit
  • Interest rates
  • Expected repayment dates and amounts
  • Current account balance
171
Q

What did the debt collection improvement act of 1996 authorize?

A

It authorized agencies to report on all credit extended individuals to credit bureaus

This allows other lenders to be aware of the extent of an individuals commitment to the federal government, and not burden the individual with additional commitments they would make, paying the governments debt more difficult

172
Q

What is the government required to do for all commercial debt and all delinquent debt?

A

Reported to credit bureaus

173
Q

What are escrow accounts and who is required to establish them?

A

Accounts to assure monies are available to pay taxes, insurance, etc.

Made in the private sector usually require one

174
Q

What are the methods that can be used to collect and record payments of debt?

A
  • payments made automatically and electronically into the government accounts. This can be done by having the government agency establish a process where by the lenders bank account receives a direct debit or their credit card is charged when payment is due
  • Electronic transfers, cannot be arranged. The debtor should be given a coupon book showing when payments are due, or at least invoiced for each payment and instructed to mail the payment to a lock box, managed by a financial institution.
  • In cases, program persons, personally collect payments from borrowers
175
Q

Who is responsible for collecting payments and updating accounts and monitoring the performance of credit recipients to ascertain whether the terms of the credit are being met and if not to determine what actions are appropriate?

A

Financial management, collects payments and updates accounts

Program management monitors, the performance of credit recipients to ascertain whether the terms of the credit are being met, and if not to determine what actions are appropriate

176
Q

What is typically done in credit defaults, or tax delinquencies?

A

A new set of terms the debt can accommodate, is negotiated rather than impose erroneous solutions, such as repossession of assets

Making the judgments as to win to negotiate, what terms are acceptable, and when to terminate the relationship, are decisions, made by the program personnel, but must be made consistent with established guidelines

177
Q

What can be done when collecting delinquent debt?
- when is delinquent debt considered uncollectible?
- when are federal agencies required to notify treasury of non-tax debts?

A
  • debt delinquent for over 180 days is frequently uncollectible so federal agencies are required by the debt collection improvement act of 1996 transfer most debt that is delinquent over 180 days to the department of treasury or a debt collection center designated by the department for further collection action
  • Federal agencies are required to notify treasury of all non-tax debts that are 120 days delinquent for purposes of administrative offset 
178
Q

What are the various methods for collecting delinquent debt?

A
  • dunning procedures
  • Offsets
  • Collection agencies
  • Asset sales
  • Referrals for litigation
179
Q

What are Dunning procedures?

A

A series of demand letters, expressing increasing concern, and urgency sent to the Detter notifying them of the default and listing the consequences of not bringing the account into current status

The letters should include a notice of intent to refer the debtors name to credit bureaus as a defaulting borrower, and should list any other collection actions. The debt can expect.

Can be done by phone

180
Q

Who is authorized to contract with private collection agencies to collect delinquent debts? How was the service paid for?

A

Federal agencies and state local governments are authorized to contract with private collection agencies to collect delinquent debts

The fee for this service is deducted from the monies collected by the agency, so there is no out-of-pocket cost for the collection agency services

181
Q

When can asset sales be held to authorize an agency to sell any non-tax debt owed to the US??

A

That that is more than 90 days delinquent, subject to the provisions of the federal credit, reform act of 1990

State and local governments can have similar provisions (example: county governments, sheriff sales, they allow public to bid on property that is delinquent in the payment of property taxes)

182
Q

Who can refer delinquent debt for litigation? Who handles this litigation? What is the result of the litigation?

A

Federal, state, and local governments can refer

The local US attorney office, law firms that specialize in his table litigation, and are under contract to the government, or in a few instances by the agencies or government general counsel

Litigation doesn’t automatically result in the collection of funds. Successful a result in a judgment against the debt they can be used to attach assets, force sales, etc..

183
Q

Why should debt be removed from the books and close out accounts?

A

It doesn’t make sense to devote resources in efforts, attempt to collect monies that are obviously uncollectible

Avoid inflating the balance sheet

184
Q

What does OMB Circular A-129, Section V, Sub-section E require for closing out debt?

A
  • debt more than two years old, and is not considered to be collectible economically is to be written off in accordance with the appropriate accounting standards
  • that is considered not currently collectible, but likely to be collected later maybe classified as CNC (currently not collectible) and retained on the agencies books
  • An agency may write off a debt for a county purposes, but keep the records open for collection purposes for an extended period of time
185
Q

What are the key requisites for the closeout process? In addition to clearly defined policies?

A
  • write off debts must be approved by a senior official. This prevents the possibility of fraud that is covered up by the unauthorized write offs of collectible, collected debts.
  • any collateral that was posted is seized and sold to recover at least part of the uncollectible monies
  • 1099C is sent to the Day and the IRS, listing the write off debt as miscellaneous income for the debtor. This last action often triggers the payment of debt it could at least generate additional tax revenue for the government.

Different states and local government have different requirements

186
Q

What are the two types of program evaluation for credit programs?

A
  1. Whether the program is meeting its objectives.
  2. Whether the debt collection procedures are effective.
187
Q

What are the most desirable measures for program evaluations of credit program?

A

Outcome measures

Finance office can provide most of the data However, for some measures, at least some of the data must be provided by the program office

188
Q

What are the four types of measures that can be used to monitor credit programs?

A
  1. Activity measures - indicate the volume of activities performed.
  2. Effectiveness measures - indicate the extent to which the program is achieving intended results.
  3. Status measures - indicate the quantity and quality of loans made and retained
  4. Efficiency measures - indicators of the cost per unit of various operations, including the various collection techniques.
189
Q

What are some possible activity measures?

A
  • Number of loans outstanding
  • Dollars of loans outstanding
  • volume of loans generated during the past year, quarter, or month
  • Volume of payment transactions received and posted
  • of exception items such as unidentifiable payments
190
Q

What are effectiveness measures intended to provide management?

A
  • information as to whether the agency is receiving sufficient value for the loans it’s making
  • Information on the effectiveness of the different collection techniques
191
Q

What are possible effectiveness measures?

A
  • percentage enrollment per million dollars of student loans
  • Number of jobs created per million dollars a small business loans
  • number of new homeowners obtaining financing
  • Number of family owned farm saved
  • Percentage of delinquent loans collected through Dunning, offset, collection, agencies, etc.
192
Q

What are possible status measures?

A
  • Number of delinquent accounts
  • Dollars of delinquent accounts
  • Age of receivables with or without delinquent receivables
  • Number of write offs
  • Amounts written off
  • Status of assets seized/repossessed
193
Q

What are the possible efficiency measures?

A
  • cost per loan processed
  • Cost per dollar collected
  • Cost to collect $1000 using an administrative offset, salary offset, income tax, refund offset, and collection agencies, etc.s
194
Q

What are administrative offsets?

A
  • commercial banks retain the right to charge deposit accounts to pay off defaulted loans
  • government agencies determine if there are other programs within the government or agency intend to make payments to the defaulting borrower, and if so, offset the delinquent debt against those payments
195
Q

What is an income tax refund offset and what policy authorizes its use?

A

Tax refunds due to delinquent debtors being offset to satisfy a debt

The IRS pay the refund to the lending agency instead of to the debtor, and notifies the debtor of the action

States have the opportunity, per the debt collection, improvement act of 1996, to use IRS tax refunds to collect delinquent, tax debt owed to states many states have similar provisions regarding state income tax refund

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