1) A company has a choice of borrowing money by issuing commercial paper or opening a line of  credit. You are to evaluate the effective annual rate of each option and choose which one the  company should use.

a) A company issues $50,000,000 of commercial paper with a 60-day maturity at a discount rate  of 1.5%. The paper is sold through a dealer for an annual charge of .10%. There is also a  backup line of credit that costs .25%. What is the effective annual cost of issuing the  commercial paper?

b) A firm has an average loan outstanding of $50,000,000 on a $75,000,000 line of credit. There  is a commitment fee of 0.25% on the unused portion of the line, the interest rate on the  borrowed funds is 1.55%, and there is a 5% compensating balance requirement?

2) You have the option of paying by fees or compensating balances for your bank fees. The following  information about your account is provided:

Average Ledger Balance $1,500,000

Deposit Float $150,000

Reserve Requirement 10%

Earnings Credit Rate 1.5%

Services charges for the month $1,425

Days in the month 30

How much is the earnings credits for the month? Is it enough to cover the service  charges? For what reason would you not want to have earnings credits used to pay for  your bank fees, but rather just pay outright to the bank and reduce your balances?

3) Company XYX pays $10.00 for a wire and $.50 for an ACH transaction. They are wondering if it  is a good idea to wire the funds or ACH funds received in their Collection Bank Account to their  Concentration Bank Account. If the funds are received in the Collection Bank Account on a  Tuesday, what is the break-even amount for a wire instead of an ACH? If the funds are received in  the Collection Bank Account on a Friday, what is the break-even amount for a wire instead of an  ACH? 

The firm’s annual opportunity cost is 4.0%.

4) A treasurer has excess cash for the day and want to choose between the following two investments  and the firms marginal tax rate is 21%:

• Investing in a 30-day Treasury Bill that has a face amount of 100,000 and trades at a 2.5%  discount, or

• Investing in a municipal money market instrument that has a Bond Equivalent Yield of 2.20% Which investment has the highest after-tax bond equivalent yield?

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5) What is the duration of a 3-year $1,000 face bond that pays a 5% coupon; and the current  YTM is 4%? What happens to the value of the bond if rates move up to 5%? What is the new  price of the bond at 5% YTM? What has happened to the bond’s duration with the increase to  5% YTM?

Face 1000

Years 3

Coupon 5%

Answer only one of the following

1. What are the primary considerations in short-term investment management? Discuss what  the policy should include regarding safety, liquidity, and yield; the basic risks, and some  of the factors that would influence pricing. You should also discuss the types of financial  instruments that one would include in a short-term (money market) investment portfolio.

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