Appendix 7: Answers to Reinforcement Quizzes
Answers to Reinforcement Quiz ñ Section I, Chapter 2
1. A county government collects funds from property taxes in late December
each year. The county releases property taxes collected on behalf of
school districts on the following July 1. Which of the following investments
would be the most prudent investment of this money for six months?
a. bond funds
b. commercial paper
c. equities
d. real estate
e.
checking account interest
Answer: (b). Commercial paper is a short-term investment instrument,
which would be the most appropriate and prudent given the limited
time period. Bond funds are long-term investments, while equities and
real estate have a greater degree of risk. The interest from a checking
account would be much less than the interest from commercial paper.
2. A county government is able to issue debt securities at an interest rate of
4 percent and can invest that money in a U.S. government Treasury bill
earning 5 percent. Which of the following could prevent this combined
transaction from being profitable?
a. total return
b. benchmarking
c.
prudent expert rule
d. arbitrage
Answer: (d). The federal government has arbitrage restrictions on the
amount that can be earned from investments.
3. Quotes for over-the-counter securities can be obtained on the:
a. NYSE.
b. NASDAQ.
c. AMEX.
d. Chicago Board of Trade.
Answer: (b). The NASDAQ provides the quotes for securities that are
traded over-the-counter. The other markets provide quotes only for the
securities that are listed on the appropriate exchange.
4. The prudent expert rule states that:
a.
only persons with investment experience should sit on a board.
b. board members must hire investment expertise if such knowledge
is not otherwise available.
c.
it is sufficient for board members to be prudent in investing
government funds.
Online version, for personal use only
AGA Study Guide 3, 2016 Edition

Appendix 7: Answers to Reinforcement Quizzes
d. board members should perform due diligence by reading and
understanding investment managerís reports before the board
meetings.
Answer: (b). If the individual or board overseeing the governmentís
investments does not have the knowledge or experience needed, then
the individual or board must acquire competent individuals or firms to
assist in the investment of those funds.
5. Which of the following investments types is the most liquid?
a. equities
b. bonds
c. debentures
d. STIFs
Answer: (d). Short-term investment funds (STIFs) give governments
the flexibility to purchase or redeem investments on a daily basis.
6. A government has a collateral agreement with its depository bank. The
collateral is held in the bankís trust department. The government is subject
to:
a. interest rate risk.
b. liquidity risk.
c. custodial credit risk.
d. systematic risk.
Answer: (c). Securities that are not held by the government or its
agent, and particularly if they are not held in the ownerís name, have
the greatest custodial credit risk.
7. The Depository Trust Company is responsible for:
a. facilitating the exchange of ownership of securities.
b. holding collateral as an interested third party.
c. handling Federal Reserve System wire payments.
d. validating the experience and knowledge of investment advisers.
Answer: (a). The Depository Trust Company (DTC) is a central
repository through which members electronically settle trades in
corporate, mortgage-backed and municipal securities, and
electronically transfer security certificates.
Online version, for personal use only AGA Study Guide 3, 2016 Edition

To continue, please log in or purchase access to this product.

Existing User: Please log in using the box at the top right of the page.

New User: See below or visit the Bookstore for all product options.

AGA CGFM Study Guide 3: Governmental Financial Management and Control