TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
92) The level of cash a firm holds is irrelevant; it can never be short of cash since a firm is able to raise new
money instantly at a fair rate, while it can never have surplus cash since the firm can invest excess cash at a
fair rate to earn a net present value (NPV) of zero.
93) A financial manager who wants her investment to have a higher return would choose to invest some of her
firm’s excess cash in commercial paper over Treasury bonds.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
94) Which of the following is NOT a motivation for holding cash?
A) to meet its day–to–day needs
B) to compensate for the uncertainty associated with cash flows
C) to satisfy bank requirements
D) to place in short–term investments
95) What is a transactions balance?
A) the cash a firm holds to counter the uncertainty surrounding its future cash needs
B) the cash a firm places into short–term investments
C) the cash a firm holds in order to pay its bills
D) the cash a firm holds to gain tax advantages
96) What is a precautionary balance?
A) the cash a firm holds to counter the uncertainty surrounding its future cash needs
B) the cash a firm places into short–term investments
C) the cash a firm holds in order to pay its bills
D) the cash a firm holds to gain tax advantages
97) What is a compensating balance?
A) the cash a firm places into short–term investments
B) the cash a firm holds in order to pay its bills
C) the cash a firm holds to gain tax advantages
D) the cash a firm holds in an account at the bank in order for the bank to perform services for that firm
98) If a firm wishes to invest cash that might be needed at short notice in the very near future, they would be
most likely to invest in which of the following securities?
A) Treasury bills
B) certificates of deposit
C) repurchase agreements
D) banker’s acceptances
99) Which of the following best describes short–term debt issued by banks with a minimum denomination of
$100,000?
A) certificates of deposit
B) repurchase agreements
C) banker’s acceptances
D) commercial paper
100) Which of the following short–term securities would a firm invest in if they wanted to invest cash for a term of
only a few days?
A) Treasury bills
B) repurchase agreements
C) banker’s acceptances
D) commercial paper
101) If a firm wishes to invest cash that might be needed at short notice in the very near future, they would be
most likely to invest in which of the following securities?
A) Treasury bills
B) certificates of deposit
C) repurchase agreements
D) banker’s acceptances
102) Which of the following is the term used to describe short–term, unsecured debt issued by large corporations,
usually in denominations greater than $100,000 or more?
A) certificates of deposit
B) repurchase agreements
C) banker’s acceptances
D) commercial paper
103) Which of the following is the term used to describe debt issued by state and local government which has a
maturity of one to six months?
A) certificates of deposit
B) banker’s acceptances
C) commercial paper
D) short–term tax exempts
104) Which of the following money market investments is a short–term debt obligations of the U.S. government?
A) Treasury bills
B) repurchase agreement
C) commercial paper
D) certificates of deposit
E) banker’s acceptance
105) Which of the following money market investments is short–term debt issued by a bank with a minimum
denomination of $100,000?
A) Treasury bills
B) banker’s acceptance
C) repurchase agreement
D) commercial paper
E) certificates of deposit
106) Which of the following money market investments is essentially a loan arrangement wherein a securities
dealer is the “borrower” and the investor is the “lender“? The investor buys securities from the securities
dealer, with an agreement to sell the securities back to the dealer at a later date for a specified higher price.
A) certificates of deposit
B) commercial paper
C) banker’s acceptance
D) repurchase agreement
E) Treasury bills
107) Which of the following money market investments is a draft written by the borrower and guaranteed by the
bank on which the draft is drawn? It is typically used in international trade transactions. The borrower is an
importer who writes the draft in payment for goods.
A) Treasury bills
B) repurchase agreement
C) certificates of deposit
D) banker’s acceptance
E) commercial paper
108) Which of the following money market investments is a short–term, unsecured debt obligation issued by a
large corporation? The minimum denomination is $25,000, but most have a face value of $100,000 or more.
A) banker’s acceptance
B) commercial paper
C) repurchase agreement
D) certificates of deposit
E) Treasury bills
109) The amount of cash a firm needs to be able to pay its bills is sometimes referred to as a(n)
A) operating balance.
B) compensating balance.
C) transactions balance.
D) precautionary balance.
110) The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs is known as
a(n)
A) speculative balance.
B) compensating balance.
C) operating balance
D) precautionary balance.
