Chapter 20—Cash, Payables, and Liquidity Management

MULTIPLE CHOICE

1. The amount of time that it takes for a check to clear through the banking system is called
a. mail float
b. processing float
c. clearing float
d. delivery float
ANS: C DIF: E REF: 20.1 Cash Management

2. Funds that have been sent by the payer, but are not yet usable by the payee are called
a. tax balance
b. ledger balance
c. float
d. none of the above
ANS: C DIF: E REF: 20.1 Cash Management

3. The collection, concentration, and disbursement of funds for the company is called
a. target cash balance
b. cash position management
c. bank account analysis
d. none of the above
ANS: B DIF: E REF: 20.1 Cash Management

4. A collection system that is characterized by many collection points with each having a depository ac-
count at a local bank is called
a. field banking system
b. mail based collection system
c. electronic invoice presentment and payment system
d. electronic bill presentment and payment system
ANS: A DIF: E REF: 20.2 Collections

5. Special post office boxes set up by the firm to expedite the receipt and processing of its accounts re-
ceivables are called
a. safety-deposit boxes
b. lockboxes
c. float reducers
d. none of the above
ANS: B DIF: E REF: 20.2 Collections

NARRBEGIN: Bavarian Brew Float

Bavarian Brew Float
Bavarian Brew receives about 350 checks a day with an average check size of $550. Currently custom-
er’s payments spend 2 days in the mail. Once a check is received it takes about 1.5 days to process it
and another 4 days to clear the banking system. The firm’s opportunity cost is 10%. Assume a 365-day
year.
NARREND
 6. What is Bavarian Brew’s collection float?
a. 4 days
b. 2 days
c. 1.5 days
d. 7.5 days
ANS: A
2+1.5+4 = 7.5

DIF: E REF: 20.1 Cash Management NAR: Bavarian Brew Float

7. What is the availability float of Bavarian Brew?

a. 2 days
b. 4 days
c. 7.5 days
d. 1.5 days
ANS: B DIF: E REF: 20.1 Cash Management
NAR: Bavarian Brew Float

8. Bavarian Brew is contemplating implementing a collection system that would decrease the collection
float by 2.5 days. What would be the annual benefit of that system?
a. $481,250
b. $48,125
c. $96,250
d. $75,480
ANS: B
reduction in float value = 2.5(350)(550)(.10) = 48125

DIF: M REF: 20.2 Collections NAR: Bavarian Brew Float

9. Bavarian Brew is contemplating implementing a lockbox system that would decrease the collection
float by 2 days. What would be the most the company should be willing to pay on an annual basis for
the system?
a. $96,250
b. $482,500
c. $38,500
d. $48,125
ANS: C
2(350)(550)(.10) = 38,500

DIF: M REF: 20.2 Collections NAR: Bavarian Brew Float

10. Bavarian Brew is contemplating implementing a lockbox system. If the system has an annual cost of
$60,000, by how many days would the float have to be reduced for the company to implement the sys-
tem?
a. 2.52 days
b. 3.12 days
c. 3.75 days
d. 4.74 days
ANS: B
x(350)(550)(.10) = 60000
 x = 3.12

DIF: M REF: 20.2 Collections NAR: Bavarian Brew Float

NARRBEGIN: Bavarian Cash Transfer

Bavarian Sausage Cash Transfer
Bavarian Sausage needs to transfer $250,000 from its deposit account into its concentration account.
The company could do it with an EDT which would cost $1.50 or a wire transfer for $17. The wire
transfer would result in the funds being deposited in the concentration account 2 days earlier. The
firm’s opportunity cost is 10% and we assume a 360 day year.
NARREND

11. What is the benefit for Bavarian Sausage from using the wire transfer?
a. $138.89
b. $69.44
c. $109.57
d. $53.61
ANS: A
marginal benefit = 250,000(10/180) = 138.89

DIF: M REF: 20.2 Collections NAR: Bavarian Cash Transfer

12. What is the net benefit for Bavarian Sausage from using the wire transfer?
a. $53.01
b. $137.89
c. $60.95
d. $121.89
ANS: D
138.89 - 17 = 121.89

DIF: E REF: 20.2 Collections NAR: Bavarian Cash Transfer

13. What is the minimum transfer amount for which the transfer would be beneficial for Bavarian Saus-
age?
a. $55,800
b. $27,900
c. $13,850
d. $41,950
ANS: B
15.50/(.1/180) = 27,900

DIF: M REF: 20.2 Collections NAR: Bavarian Cash Transfer

14. Your supplier offers you trade terms of 3/10 net 40. What is the implicit interest that you pay on the
trade credit if you do not take the discount?
a. 37.63%
b. 0%
c. 36.50%
d. 28.22%
ANS: A
r = (.03/.97)(365/(40-10)) = .3763
 DIF: M REF: 20.3 Accounts Payable and Disbursements

15. You are contemplating purchasing a $1,000,000 181 day T-Bill that is selling at a discount of 4.25%.
What is the dollar discount on the T-Bill?
a. $21,368.06
b. $42,500
c. $38,845.26
d. $19,367.51
ANS: A
(1000000)(.0425)(181/360) = 21368.06

DIF: M REF: 20.4 Short-Term Investing and Borrowing

16. You are contemplating purchasing a $1,000,000 181 day T-Bill that is selling at a discount of 4.25%.
What is the purchase price of the T-Bill?
a. $21,368.06
b. $978,631.94
c. $1,000,000
d. $954,621.52
ANS: B
discount = (1000000)(.0425)(181/360) = 21368.06
pp = 1,000,000 - 21368.06 = 978631.94

DIF: M REF: 20.4 Short-Term Investing and Borrowing

17. You are contemplating purchasing a $1,000,000 181 day T-Bill that is selling at a discount of 4.25%.
What is the money market yield of the T-Bill?
a. 4.34%
b. 4.25%
c. 4.40$%
d. 4.15%
ANS: A
discount = 21368.06
pp = 978631.94
MMY = (21368.06/978631.94)(360/181) = 0.0434

DIF: M REF: 20.4 Short-Term Investing and Borrowing

18. You are contemplating purchasing a $1,000,000 181 day T-Bill that is selling at a discount of 4.25%.
What is the bond market yield of the T-Bill?
a. 4.25%
b. 4.34%
c. 4.40%
d. 4.15%
ANS: C
0.0434(365/360) = .0440

DIF: M REF: 20.4 Short-Term Investing and Borrowing

19. Smith Enterprise has a one year credit line of $5,000,000 with Second Bank. On average Smith uses
half of the credit line. Second Bank charges a .67% commitment fee on the unused portion of the line
and the interest rate is set at LIBOR +2%. Assuming that the LIBOR is currently at 4.3%, what is
Smith’s effective borrowing rate?
a. 6.97%
b. 6.30%
c. 7.21%
d. 5.98%
ANS: A
{(.063× 2500000)+(.0067× (5000000-2500000)}/2500000× (365/365) = .0697

DIF: M REF: 20.4 Short-Term Investing and Borrowing

NARRBEGIN: Smith Credit line

Smith Enterprise Credit Line
Smith Enterprise has a one year credit line of $5,000,000 with Second Bank. On average Smith uses
$3,250,000 of the credit line. Second Bank charges a .45% commitment fee on the unused portion of
the line and the interest rate is set at LIBOR +1.5%. The bank also requires a 5% compensating bal-
ance.
NARREND

20. What is the most that Smith can effectively borrow against the line without having to deposit addition-
al funds with the bank?
a. $5,000,000
b. $4,255,374
c. $4,586,408
d. $4,761,905
ANS: D
5000000/(1+.05) = 4761905

DIF: M REF: 20.4 Short-Term Investing and Borrowing

NAR: Smith Credit line

21. If Smith needs to borrow $3,250,000, what is the effective borrowing rate if the LIBOR equals 6.3%?
a. 8.62%
b. 8.04%
c. 7.59%
d. 8.43%
ANS: D
loan out = 3250000/(1-.05) = 3421053 (incl. comp balance)
EBB = {(.078× 3421053)+[.0045(5000000-3421053)]}/3250000 × 365/365 = .0843

DIF: H REF: 20.4 Short-Term Investing and Borrowing

NAR: Smith Credit line

NARRBEGIN: Smith Credit Ln -w/o comp

Smith Enterprise Credit line (w/o comp)
Smith Enterprise has an one year credit line of $5,000,000 with Second Bank. On average Smith uses
$3,250,000 of the credit line. Second Bank charges a .45% commitment fee on the unused portion of
the line and the interest rate is set at LIBOR +1.5%. Assume that the LIBOR is 6.3%
NARREND
22. What is Smith’s effective borrowing rate?
a. 8.45%
b. 7.59%
c. 8.04%
d. 7.80%
ANS: B
EBR = {.078× 3250000)+[(.0045(5000000-3250000)]}/3250000 × 365/365 = .0804

DIF: M REF: 20.4 Short-Term Investing and Borrowing

NAR: Smith Credit Ln -w/o comp

23. Refer to Smith Enterprise Credit line (w/o comp). If you only borrowed $2,000,000 against the line,
what would be your effective borrowing rate?
a. 7.80%
b. 8.04%
c. 8.45%
d. 8.48%
ANS: A
EBR = {.078× 2000000)+[(.0045(5000000-2000000)]}/2000000 × 365/365 = .0848

DIF: M REF: 20.4 Short-Term Investing and Borrowing

NAR: Smith Credit Ln -w/o comp

24. Refer to Smith Enterprise Credit line (w/o comp). What is the change in your EBR if you only borrow
$2,000,000 instead of $3,250,000?
a. increases by .44%
b. decreases by .44%
c. does not change
d. increases by .78%
ANS: A
at 2.5M: 8.48%
at 3.25M: 8.04%
change 8.48-8.04 = .44

DIF: M REF: 20.4 Short-Term Investing and Borrowing

NAR: Smith Credit Ln -w/o comp

25. Refer to Smith Enterprise Credit line (w/o comp). What would be the effective borrowing rate if you
exhausted your line of credit?
a. 8.04%
b. 7.80%
c. 8.48%
d. 8.21%
ANS: A
{.078× 5000000+(.0045(5000000-5000000)}/5000000 × 365/365 = .078

DIF: M REF: 20.4 Short-Term Investing and Borrowing

NAR: Smith Credit Ln -w/o comp

26. Most money market mutual funds set their net asset value at a fixed _____ per share.
 a. $1
b. $10
c. $100
d. $1,000
ANS: A DIF: E REF: 20.4 Short-Term Investing and Borrowing

27. The cash manager should seek to

a. maximize disbursement float and maximize collection float.
b. minimize disbursement float and minimize collection float.
c. maximize disbursement float and minimize collection float.
d. minimize disbursement float and maximize collection float.
ANS: C DIF: E REF: 20.1 Cash Management

28. Which of hte following has the greatest potential to be the longest?
a. mail float
b. processing float
c. availability float
d. clearing float
ANS: A DIF: E REF: 20.1 Cash Management

29. A major retail firm like Walmart or Target would most likely not use
a. point of sale information systems
b. a cash concentration bank
c. lock boxes
d. any of the above
ANS: C DIF: E REF: 20.2 Collections

30. A producer of specialty electronic components is located in Arkansas, while many of its customers are
located in California, Texas, and Florida. This company may seek to use
a. electronic invoice presentment and bill paying.
b. lock boxes.
c. concentration banks.
d. all of the above.
ANS: D DIF: E REF: 20.2 Collections

31. The benefit(s) of a lock box system include

a. reduction of mail float.
b. reduction of processing float.
c. reduction of availability float.
d. all of the above.
ANS: D DIF: E REF: 20.2 Collections

32. In which situation below would a lock-box system likely produce greater benefits?
a. when interest rates are vey low
b. when interest rates are very high
c. when the firm’s customers are concentrated locally
d. when the firm collects with ACH transfers
ANS: B DIF: E REF: 20.2 Collections
33. Extending payment beyond the due date in order to reduce the cash conversion cycle
a. is an accepted “stretching” of credit terms.
b. is an unethical cash management practice.
c. is an unethical cash management practice, but can be viewed as acceptable.
d. is backwards; this actually increases the cash conversion cycle.
ANS: B DIF: E REF: 20.3 Accounts Payable and Disbursements

34. The purpose of a “positive pay” service is to

a. reduce availability and clearing float
b. only clear checks when a firm’s cash balance is positive.
c. reduce a firm’s exposure to check fraud.
d. move funds to into a zero balance account.
ANS: C DIF: E REF: 20.3 Accounts Payable and Disbursements

35. Place the following in the correct order of priority for selecting short therm investments:
a. expected return, liquidity, preservation of capital
b. expected return, preservation of capital, liquidity
c. liquidity, expected return, preservation of capital
d. preservation of capital, liquidity, expected return
ANS: D DIF: M REF: 20.4 Short-Term Investing and Borrowing

36. For which of the following would missing (that is, not taking) the discount be the least costly?
a. 2/10 net 40
b. 1/15 net 60
c. 3/10 net 70
d. 1/10 net 50
ANS: B DIF: M REF: 20.3 Accounts Payable and Disbursements

37. Suppose your firm can borrow at 10%. Which of the following discounts should your firm take?

I. 2/10 net 30
II. 1/15 net 60
III. 3/10 net 70
IV. 1/10 net 45

a. II only
b. I and III
c. II and IV
d. I, III, and IV
ANS: D DIF: M REF: 20.3 Accounts Payable and Disbursements

38. Which of the following credit terms has the highest relevant cost?
a. 3/10 net 60
b. 2/10 net 30
c. 2/15 net 45
d. 4/15 net 90
ANS: B DIF: E REF: 20.3 Accounts Payable and Disbursements

NARRBEGIN: Dilly Deli

Dilly Deli, Inc.
 Dilly Deli, Inc., a nation-wide chain of deli-style restaurants, has built a $34,000 balance in one of its
regional bank accounts. It wishes to move $30,000 to its main concentration account. A DTC cost
$1.50 and requires 3 days to clear; an EDT costs $3.00 but requires only 1 day to clear; and a wire
transfer costs $15 and clears the same day. Dilly Deli, Inc. can earn 7% on short term investments.
NARREND

39. Refer to Dilly Deli. Which of the following is true?

a. The wire transfer dominates both the DTC and the EDT.
b. The wire transfer dominates the EDT but not the DTC.
c. The DTC dominates both the EDT and the wire transfer.
d. The EDT dominates the DTC and the wire transfer.
ANS: D DIF: M REF: 20.2 Collections
NAR: Dilly Deli

40. If the earnings rate for Dilly Deli, Inc. is 3%, which of the following is true?
a. The wire transfer dominates both the DTC and EDT.
b. The wire transfer dominates the EDT but not the DTC.
c. The DTC dominates both the EDT and the wire transfer.
d. The EDT dominates the DTC and the wire transfer.
ANS: D DIF: M REF: 20.2 Collections
NAR: Dilly Deli

41. Refer to Dilly Deli. Again assume short term investments can earn 7%. What is the minimum amount
that needs to be transferred in order to make the wire transfer more cost effective than the EDT?
a. $62,751
b. $78,214
c. $70,393
d. $66,482
ANS: A DIF: M REF: 20.2 Collections
NAR: Dilly Deli

42. Currently, a 91-day Treasury bill sells at a 2.5% discount. What is the price of a $1 million invest-
ment?
a. $993,967.12
b. $871,250.00
c. $993,750.00
d. $993,680.56
ANS: D DIF: E REF: 20.4 Short-Term Investing and Borrowing

43. Currently, a $1 million, 91-day T-bill sells at a 2.5% discount. What is the money market yield?
a. 2.500%
b. 2.516%
c. 2.551%
d. 2.532%
ANS: B DIF: M REF: 20.4 Short-Term Investing and Borrowing

44. Currently, a $1 million, 91-day T-bill sells for a 2.5% discount. What is the bond equivalent yield?
a. 2.500%
b. 2.516%
c. 2.551%
 d. 2.532%
ANS: C DIF: M REF: 20.4 Short-Term Investing and Borrowing

45. Suppose the cash manager of Smart Products just bought a 91-day T-bill for $992,416.67. What are
the discount and bond equivalent yields on this security?
a. 3.06%, 3.03%
b. 3.03%, 3.06%
c. 3.00%, 3.06%
d. 3.00%, 3.03%
ANS: C DIF: M REF: 20.4 Short-Term Investing and Borrowing

NARRBEGIN: Coyote Valley

Coyote Valley Products
Coyote Valley Products has daily cash collections of $500,000. The cash management staff has de-
termined (1) customers’ payments are in the mail an average of 3 days; (2) processing after receipt av-
erages 1 day; and (3) after deposit funds are cleared on average in 2 days. Assume a 365 day year.
NARREND

46. Refer to Coyote Valley Products. What is the firm’s collection float, in days?
a. 6
b. 5
c. 4
d. 3
ANS: A DIF: E REF: 20.2 Collections
NAR: Coyote Valley

47. If Coyote Valley Products faces a 9% opportunity cost of funds, what is the value of reducing float by
2 days?
a. $1,000,000
b. $45,000
c. $49,315
d. $90,000
ANS: D DIF: M REF: 20.2 Collections
NAR: Coyote Valley

48. If Coyote Valley Products faces an 8% opportunity cost of funds, what is the most is would pay to im-
plement a lock-box system that reduces collection float by 2 days?
a. $40,000
b. $60,000
c. $80,000
d. $100,000
ANS: C DIF: M REF: 20.2 Collections
NAR: Coyote Valley

49. Coyote Valley’s bank, Grand Lake National, proposes a lock-box collection and processing arrange-
ment that will reduce collection float by 2 days. If the system will cost Coyote Valley $115,000 per
year, what is the minimum opportunity cost of funds that would make the system beneficial?
a. 23.0%
b. 15.6%
c. 19.8%
 d. 11.5%
ANS: D DIF: M REF: 20.2 Collections
NAR: Coyote Valley

50. What would be the benefit of a lock-box system that reduced mail float by 1.5 days, eliminated pro-
cessing float, and reduced clearing float by 1 day, if Coyote Valley Products faces a 9% opportunity
cost of funds?
a. $112,500
b. $157,500
c. $180,000
d. $67,500
ANS: B DIF: M REF: 20.2 Collections
NAR: Coyote Valley

51. The firm needs to manage its accounts payable in a fashion that
a. lengthens the payment period.
b. preserves the firm’s credit reputation.
c. both a and b.
d. neither a nor b.
ANS: C DIF: E REF: Introduction

52. Liquidity management involves

a. earning a postive return on idle excess cash balances.
b. obtaining low-cost financing for meeting unexpected needs and seasonal cash shortages.
c. maintaining the greatest degree of liquidity possible for the firm’s assets.
d. both a and b
ANS: D DIF: E REF: Introduction

53. The primary role(s) of the cash manager is

a. to manage the cash flow time line related to collection of funds.
b. to manage the cash flow time line related to concentration of funds.
c. to manage the cash flow time line related to disbursement of funds.
d. all of the above
ANS: D DIF: E REF: 20.1 Cash Management

54. Funds that have been sent by the payer but are not yet usable funds to the payee are
a. float.
b. overdrawn funds.
c. still available for the use of the payer.
d. none of the above.
ANS: A DIF: E REF: 20.1 Cash Management

55. The primary role of the cash manager

a. on the collections side is to minimize collection float and to maximize float on the pay-
ments side.
b. on the collections side is to maximize collection float and to minimize float on the pay-
ments side.
c. on the collections side is to maximize collection float and to maximize float on the pay-
ments side.
d. none of the above.
 ANS: A DIF: E REF: 20.1 Cash Management

56. The time between receipt of the payment and its deposit into the firm’s account is
a. mail float.
b. processing float.
c. availability float.
d. clearing float.
ANS: B DIF: M REF: 20.1 Cash Management

57. $100 million dollar days of float could be arrived at by

a. $100 million dollars worth of checks with an average of 5 days of float.
b. $20 million dollars worth of checks with an average of 5 days of float.
c. $10 million dollars worth of checks with an average of 20 days of float.
d. $10 million dollars worth of checks with an average of 5 days of float.
ANS: B DIF: E REF: 20.2 Collections

58. A business such as a restaurant, that receives local checks, cash, and debit card payments is more
likely to utilize a(n)
a. field-banking system for collections.
b. mail-based system for collections.
c. electronic system for collections.
d. lockbox system for collections.
ANS: A DIF: M REF: 20.2 Collections

59. The difference between a lockbox system and a mail-based system is

a. that a mail-based system is more secure.
b. that a lockbox system is really a post office box that is emptied by the firm’s bank.
c. that a lockbox system requires a larger in-house collection system for the firm.
d. none of the above.
ANS: B DIF: M REF: 20.2 Collections

60. The Barrell Company is approached by a bank that offers to implement a lockbox system of receipts
for the firm. If the new system is implemented, it will reduce float by 6 days per year. If Barrell’s cost
of capital is 11.5% and its annual sales are expected to be $10,00,000, then what is the maximum
amount that Barrell is willing to pay for the lockbox system?
a. $1,890.41
b. $18,904.11
c. $164,438.56
d. $1,150,000.00
ANS: B
10,000,000 × (6/365) × .115 = 18,904.11

DIF: M REF: 20.2 Collections

61. Your firm is expected to have $15,000,000 in sales next year and its cost of capital is 13.5%. How
many days of float will a lockbox system have to save you in order to pay for a system that will cost
your firm $27,740 per year?
a. 2 days
b. 3 days
c. 4 days
 d. 5 days
ANS: D
27,740 = 15,000,000 × (days/365) × .135

days = 5

DIF: M REF: 20.2 Collections

62. An unsigned check drawn on one of the firm’s bank accounts and deposited in another of the firm’s
bank accounts is
a. an automated clearinghouse debit transfer.
b. a depository transfer check.
c. a wire transfer.
d. none of the above.
ANS: B DIF: M REF: 20.2 Collections

63. A preauthorized electronic withdrawl for the payer’s account is known as

a. a depository transfer check.
b. an automated clearinghouse debit transfer.
c. a wire transfer.
d. none of the above.
ANS: B DIF: M REF: 20.2 Collections

64. You need to decide whether your firm should transfer funds from a deposit account to a transfer ac-
count via EDT that will cost $2 or via a wire transfer that will cost $20. It is a Friday so the wire trans-
fer will save you 3 days of float. If your cost of capital is 8%, then how large must the transfer be in
order to be indifferent between the wire and the ADT? round to the nearest dollar.
a. $82,125
b. $30,417
c. $27,375
d. $3,042
ANS: C
Differential cost = $18

18 = size × (3/365) × .08

size = 27,375

DIF: M REF: 20.2 Collections

65. A component of the average payment period is

a. the time from the purchase of raw materials until the firm places the payment in the mail.
b. the time it takes after the firm places its payment in the mail until the supplier has with-
drawn funds from the firm’s account.
c. both a and b
d. either a or b
ANS: C DIF: M REF: 20.3 Accounts Payable and Disbursements

66. The primary purpose of the accounts payable function

a. is to examine all incoming invoices and determine the proper amount to be paid.
 b. is to generate float for the firm.
c. is to pay invoices as soon as possible.
d. none of the above.
ANS: A DIF: E REF: 20.3 Accounts Payable and Disbursements

67. National Groceries chooses to have it local stores make payments on their own payables. National
utilizes a
a. centralized payment system.
b. fragmented payment system.
c. decentralized payment system.
d. none of the above.
ANS: C DIF: E REF: 20.3 Accounts Payable and Disbursements

68. Near-cash assets in the form of short-term investments are often called
a. marketable securities.
b. corporate bonds.
c. treasury notes.
d. treasury bonds.
ANS: A DIF: E REF: 20.4 Short-Term Investing and Borrowing

69. A supplier has offered you credit term of 3/10 net 30. What is the implied rate of interest in the terms?
a. 56.44%
b. 37.08%
c. 5.69%
d. 3.09%
ANS: A
(.03/.97) × (365/20) = .5644

DIF: M REF: 20.4 Short-Term Investing and Borrowing

70. You are offered credit terms of 1/20 net 45. What is the implied rate of interest by the discount?
a. 1.01%
b. 12.12%
c. 14.75%
d. 25.25%
ANS: C
(.01/.99) × (365/25) = .1475

DIF: M REF: 20.4 Short-Term Investing and Borrowing

71. Your cost of capital is 16% and you are offered credit terms of 1/10 net 60. Do you take the discount
or not and why?
a. you take the discount because 7.37% is less than 16%
b. you do not take the discount because 7.37% is less than 16%
c. you take the discount becasue 23.37% is greater than 16%
d. you do not take the discount because 7.37% is less than 16%
ANS: B
(.01/.99) × (365/50) = .0737 < .16 ====> you do not take the discount
 DIF: H REF: 20.4 Short-Term Investing and Borrowing

72. Your cost of capital is 8% and you are offered a discount of 1% for early payment, otherwise the entire
amount is due in 60 days. How many days after purchase will cause you to be indifferent between tak-
ing the discount and not taking the discount?
a. 46.08 days
b. 21.69 days
c. 13.91 days
d. 60 days
ANS: C
.08 = (.01/.99) × (365/[60 - discount days])

discount days = 13.91 days

DIF: H REF: 20.4 Short-Term Investing and Borrowing

73. A bank service that provides early notification of checks that will be presented against a company’s ac-
count on a given day is called
a. a controlled disbursement.
b. a positive pay disbursement.
c. an integrated accounts payable.
d. none of the above.
ANS: A DIF: E REF: 20.4 Short-Term Investing and Borrowing

74. What is the money market yield for a one-year treasury bill that is priced at a 4% discount?
a. 3.83%
b. 4%
c. 4.17%
d. 4.22%
ANS: C
discount = .04 × 1,000 = 40

money market yield = 40 /960 = 4.17%

DIF: M REF: 20.4 Short-Term Investing and Borrowing

75. A 60 day treasury bill is priced at a 4% discount rate. What is the bond-equivalent yield of the secur-
ity?
a. 4.00%
b. 4.03%
c. 4.08%
d. 6.67%
ANS: C
discount = .04 × (60/360) × 1,000 = 6.67

money market yield = [6.67 / (1,000 - 6.67)] × (360/60) = .040269

bond equivalent yield = .040269 × (365/360) = .0408277

DIF: H REF: 20.4 Short-Term Investing and Borrowing