IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 881:

  What happens to the price of a three-year $1 .000 bond with an 8% coupon when market interest rates change from 8% to 6%?

  A. A price increase of $7.68.

  B. A price decrease of $7.68.

  C. A price increase of $53.84.

  D. A price decrease of $53.84.

  Correct Answer: C

• Question 882:

  According to John Maynard Keynes, the three major motives for holding cash are for

  A. Transactional, psychological, and social purposes.

  B. Speculative, fiduciary, and transactional purposes.

  C. Speculative, social, and precautionary purposes.

  D. Transactional, precautionary, and speculative purposes.

  Correct Answer: D

  John Maynard Keynes, founder of Keynesian economics, concluded that there were three major motives for holding cash: for transactional purposes as a medium of exchange. Precautionary purposes and speculative purposes (but only during deflationary periods).

• Question 883:

  Some managers express the opinion that their "cash management problems are nothing more than inventory problems." They then proceed to use cash management models, such as the EOQ model, to determine the

  A. Credit and collection policies.

  B. Marketable securities level.

  C. Proper relationship between current assets and current liabilities.

  D. Proper blend of marketable securities and cash.

  Correct Answer: D

  Since cash and inventory are both nonearning assets, in principle they may be treated similarly. The alternative to holding cash, however, is to hold marketable securities that do earn interest or dividends. Thus, a cash management model would determine how much of a firm's liquidly should be held as cash and how much in the 1torm of marketable securities.

• Question 884:

  A topical firm doing business nationally cannot expect to accelerate its cash inflow by

  A. Establishing multiple collection centers throughout the country.

  B. Employing a lockbox arrangement.

  C. Initiating controls to accelerate the deposit and collection f large checks.

  D. Maintaining compensating balances rather than paying cash for bank services.

  Correct Answer: D

  Compensating balances are either (1) an absolute minimum balance or (2) a minimum average balance that bank customers must keep at the bank. These are generally required by the bank to compensate for the cost of services rendered. Maintaining compensating balances will not accelerate a company's cash inflows because less cash will be available even though the amount of cash coming in remains unchanged.

• Question 885:

  Which of the following models is essentially an application to cash management of the inventory economic order quantity (EOQ) formula?

  A. Miller-Or cash management model.

  B. Baumol cash management model.

  C. Altman's Z-Score model.

  D. Arbitrage pricing model.

  Correct Answer: B

  The Bauman cash management model is essentially the inventory EOQ model in that it minimizes the total of fixed trading costs and cash carrying costs. It is a deterministic model in the same way that the icon model is deterministic.

• Question 886:

  A firm has daily cash receipts of $200,000. A commercial bank has offered to reduce the collection time by 3 days. The bank requires a monthly fee of $4,000 for providing this service. If money market rates will average 12% during the year, the additional annual income (loss) of having the service is

  A. $(24,000).

  B. $24,000.

  C. $66,240.

  D. $68,000.

  Correct Answer: B

  Since collect ones will be expedited by three days at the rate of $200,000 per day, the company will have an additional $600,000 to invest. At 12%, the interest earned would be $72,000 per year. However, the bank will charge $48,000 (12 months x $4,000 per month) for its services. Thus, the firm will increase its income by $24,000 ($72,000 -- $48,000).

• Question 887:

  In smaller businesses in which the management of cash is but one of numerous functions performed by the treasurer. Various cost incentives and diversification arguments suggest that surplus cash should be invested in

  A. Commercial paper.

  B. Bankers' acceptances.

  C. Money market mutual funds.

  D. Corporate bonds.

  Correct Answer: C

  A small firm with surplus cash should invest for the highest return and lowest risk. The ability' to convert the investment into cash without a loss of principal is also important. Money market mutual funds invest in .y market certificates such as treasury bills, negotiable CDs, and commercial paper. Because of diversification, these mutual funds are superior to any single instrument.

• Question 888:

  A firm has daily cash receipts of $300,000. A bank has offered to provide lockbox service that will reduce the collection time by 3 days. The bank requires a monthly fee of $2,000 for providing this service. If money market rates are expected to average 6% during the year, the additional annual income (loss) of using the lockbox service is

  A. ($24,000)

  B. $12,000

  C. $30000

  D. $54000

  Correct Answer: C

  Because collections will be accelerated by 3 days at a rate of $300,000 per day, the company will have an additional $900,000 to invest. Ata rate of 6%, the interest earned will be $54,000 per year. However, the bank will charge $24,000 (12 months x $2,000 per month) for its services. Thus, the firm will increase its income by $30000 ($54 .000 -- $24 .000).

• Question 889:

  Which one of the following is not a characteristic of a negotiable certificate of deposit?

  Negotiable certificates of deposit

  A. Have a secondary market for investors.

  B. Are regulated by the Federal Reserve System.

  C. Are usually sold in denominations of a minimum of $100,000.

  D. Have yields considerably greater than bankers' acceptances and commercial paper.

  Correct Answer: D

  A certificate of deposit (CD) is a form of savings deposit that cannot be withdrawn before maturity without incurring a high penalty. A negotiable CD can be traded. CDs usually have a fairly high rate of return compared with other savings instruments because they are for fixed, usually long-term periods. However, theiryield is less than that of commercial paper and bankers' acceptances because they are less risky.

• Question 890:

  A company uses the following formula in determining its optimal level of cash.

  

  Where: B=fixed cost per transaction T= total demand for cash over a period of time I=interest rate on marketable securities This formula is a modification of the economic order quantity (EOQ) formula used for inventory management. Assume that the fixed cost of selling marketable securities is $10 per transaction and the interest rate on marketable securities is 6% per year. The company estimates that it will make cash payments of $12000 over a one-month period. What is the average cash balance (rounded to the nearest dollar)?

  A. $1,000

  B. $2,000

  C. $3,464

  D. $6,928

  Correct Answer: C