Essential Learning for CTP Candidates New York Cash … · 2018-04-14 · Overview of Chapter 6 Topics ... Greater competition among global markets ... (APIC) Book value per

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Essential Learning for CTP CandidatesNew York Cash Exchange: 2015 – Session #7

Copyright © 2015 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org

New York Cash Exchange: 2015Essential Learning for CTP CandidatesSession #7: Thursday Afternoon (5/28)

ETM4-Chapter 6:Capital Markets

ETM4-Chapter 12:Long-Term and Capital Instruments

ETM4-Chapter 10:Collections, Concentration & Disbursements

© 2015 - The Treasury Academy, Inc. - All Rights Reserved 1

Essentials of Treasury Management, 4th Ed. (ETM4) is published by the AFP which holds the copyright and all rights to the related materials.

As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text.

Overview of Chapter 6 Topics

Introduction Overview of Capital

Markets

Debt Market Equity(Stock)

Securities

2© 2015 - The Treasury Academy, Inc. - All Rights Reserved

Introduction The movement toward global markets is being

driven by:◦ Major source of funding and investment for many

types of organizations

◦ Organizations seek to raise capital on a global basis in order to overcome local market imperfections or inefficiencies and to lower costs of funds

◦ Investors look to increase their returns

◦ Advances in data processing/telecommunications

◦ Fewer restrictions on cross-border capital flows

◦ Deregulation of domestic capital markets

◦ Greater competition among global markets


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Group Exercise

Working in your groups,answer the following questions:

What are “Fixed-Income” securities?

What are some of the key differences between fixed income investments and equity investments?

Which group is harder to manage?


More on Capital Markets Two Basic Capital Market Segments

◦ Debt: Fixed income capital

◦ Equity: Shares of common orpreferred stock

Markets and exchanges are managed by various regulatory bodies

Capital markets play an important role in the valuation of securities

Valuation is built on theories of the time value of money and the analysis of cash flows


Overview of Capital Markets The Basics of Capital Markets◦ Money versus Capital Markets

◦ Debt versus Equity Markets

Key Participants◦ Issuers of Securities

◦ Investors

◦ Broker-Dealers(Investment Banking &Brokerage Firms)

◦ Regulators

◦ Other Participants


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More on Market Participants Issuers of Securities◦ Governments & Central Banks (Debt)

◦ Corporations (Debt & Equity)

◦ State-Owned Enterprises – SOE (Debt)

◦ Sub-Sovereign Entities/Municipalities (Debt)

◦ Mutual Fund Companies (Debt & Equity)

Investors (Retail vs. Institutional) Investment Banking and Brokerage Firms◦ Investment bankers

◦ Origination desks

◦ Securities traders


Different Capital Markets Division of Capital Markets◦ Primary markets◦ Secondary markets◦ Private markets

Security Exchanges and OTC Markets◦ Facilitate the buying and selling of securities◦ Major exchanges in most developed nations◦ OTC markets tend to be more decentralized◦ Financial markets in developing countries or

emerging markets are often run on an OTC basis until volumes increase


Benefits of Organized Exchanges

Provide a market system where the competitive forces of supply and demand determine securities prices

Sustain a market where frequent trading minimizes price volatility between individual trades

Maintain a market large enough to enable issuers to raise large amounts of capital through securities offerings

Furnish a regulated environment to help ensure fairness for exchange participants


4



Debt Market Medium- and Long-Term Borrowing◦ Term Loan◦ Medium- or Intermediate-Term Notes◦ Long-term Bonds Mortgage Bonds

Unsecured Bonds (Debentures)

Convertible Bonds

Sovereign Bonds

Sub-Sovereign Bonds (Munis)

Eurobonds

Zero-Coupon Bonds

High-Yield Bonds10

© 2015 - The Treasury Academy, Inc. - All Rights Reserved

Other Types of Bonds Income Bonds Collateral Trust Bonds Equipment Trust Certificates Index Bonds Economic Development Bonds Tax Increment Financing (TIF) Bonds Tender Option Bonds International Bonds◦ Foreign bonds◦ Global bonds◦ Multicurrency bonds


Other Forms of Debt CapitalFloating (Adjustable)

Rate DebtProject FinancingSecuritizationOff-Balance-Sheet

Financing


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Debt Contract Provisions Debt(Bonds and Term Loan) indentures

and covenants Representations and warranties Events of default Material Adverse Change (MAC) clause Call and Put provision Sinking funds Refinancing Defeasance of debt Promissory note Collateral Liens


Group Exercise

Working in your groups,answer the following questions:

What is the role of credit enhancements and guarantees in the world of debt securities?

What is meant by the term “maturity matching” when using debt as a source of capital?


Other Factors in Using Debt as a Source of Capital Credit Enhancements Guarantees◦ Full, Specific Project, Guarantee of

Payment or Collection, Comfort Letter, Performance, Personal

Bond/Credit Ratings Maturity Matching Effects of Interest Rate

Levels and Forecasts Availability of Collateral


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Equity(Stock) Securities

Common Stock Preferred Stock Hybrid Securities Depositary

Receipts (DRs)


Common Stock Represents ownership in a company Balance Sheet Accounts and

Definitions◦ Par value◦ Retained earnings◦ Additional Paid-in-Capital (APIC)◦ Book value per share◦ Market value per share◦ Treasury stock

Types of Common Stock◦ Multiple Classes◦ Tracking Stock


Preferred Stock Major Provisions or Preferred Stock Issues◦ Priority claim on earnings and assets

◦ Typically fixed as a percentage of par value

◦ Cumulative dividendsin arrears

◦ Voting rights/Seat on board

◦ May be convertible

Evaluation of Preferred Stock

Users of Preferred Stock◦ Financial institutions are heavy issuers

◦ Young/high-growth/financial distressed firms

◦ Adjustable-rate preferred stock

◦ Convertible preferred shares in mergers© 2015 - The Treasury Academy, Inc. - All Rights Reserved 18

7




Introduction Managing Capital

Market Investments

Valuation of Long-Term Securities


Objectives of Capital Market Investments

Goals should be expressed in terms of risk and return and should conform to the organization’s investment policies

Capital preservation is not necessarily the primary goal for capital investments

Guidelines to consider:◦ Risk preferences for the portfolio◦ Return objectives◦ Liquidity needs◦ Time horizons or future needs for funds◦ Tax issues◦ Legal or regulatory factors (especially for pension

funds) Asset Allocation Decision


L-T, Fixed Income Portfolio Mgmt. Many of the issues are similar to those

covered in Chap 11 (Money Markets) Concept of Duration◦ Primary measure of risk for a bond portfolio◦ Weighted average maturity of investment◦ Measure of sensitivity of the investment to

changes in underlying interest rates◦ Bond prices move inversely to interest rates

Interest Rate Risk◦ Longer term bonds will fluctuate

more in price for a given changein interest rates than shorter term bonds


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Other Issues in Debt Portfolio Mgmt.

Fixed/Floating Ratio◦ Usually expressed in terms

of a target ratio

◦ May be too narrow to be used on its own

Foreign Currency Denominated Investments◦ FX derivatives may be used to manage risk

Using Derivatives in a Long-Term Debt Portfolio◦ Use of credit default swaps, in addition to futures

forwards and options

Asset-Liability Management◦ Especially a problem when S-T funds are borrowed

to fund L-T investments


Equity (Stock) Portfolio Mgmt. Defining and Measuring Investment Risk◦ Expected return and standard deviation◦ Use of covariance in portfolio management

Benefits of Diversification◦ Reduces the overall riskiness of a portfolio

Capital Asset Pricing Model (CAPM)◦ Beta is a measure of relative market risk◦ In a diversified portfolio, Beta is the only relevant measure to

an investor CAPM – Model Relationship


E

RF

M

E RF M RF i

Where: r Required rate of return on stockholder's equity

r Expected rate of return on the risk-free asset

r Expected rate of return on the market portfolio

r r (r r )

i Beta value for stock i

CAPM Calculation Example Assume a risk-free rate (T-bill) of 2.0%, a

market rate of return of 8.0%, and historic Beta for Apple Computer of 1.5:

Assume the same information as above, but for H.J. Heinz with a Beta of 0.60:


E RF M RF i

E

r r (r r )

r 0.02 (0.08 0.02)(1.5) 0.110 11.0%

E RF M RF i

E

r r (r r )

r 0.02 (0.08 0.02)(0.6) 0.056 5.6%

Source: ETM4 - © AFP

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Determining Portfolio Risk & Return One of the biggest benefits of using CAPM and

Beta is the ability to determine a portfolios average return and overall riskiness as a function of simple weighted averages

Using the stocks from the previous slide with weights of Apple(A) = 70% and Heinz(H) = 30%


Portfolio β = (% of A-Stock β ) + (% of H-Stock β )

= (.70 1.5) + (.30 0.60) = 1.23

A H

Port. Return = (% of A-Stock r ) + (% of H-Stock r )

= (.70 11.0%) + (.30 5.6%) = 9.38%

A H

E RF M RF Portfolior r (r r )

= .02 + (.08 .02)(1.23)= 0.0938 or 9.38%

Bond or Fixed Income Valuation Valuation of bonds or any fixed income

security is generally fairly easy Concept of Yield to Maturity (YTM) Some bonds have call provisions (YTC) Concept of Yield to Worst (YTW)◦ Can also be used with other types of bonds

to determine the impact of all potentially negative provisions (pre-payments, sinking funds, etc.)


Valuation of Long-Term Securities

Publicly traded corporate securities are valued by financial markets

The value is based on the cash flow stream expected by the investor as well as the relevant discount rate:

◦ Where: PV0 = Current value of the assetCFt = Cash flow in period tki = Opportunity cost for asset i


nt 1 2 n

0 t 1 2 nt 1 i i i i

CF CF CF CFPV ....

(1 k ) (1 k ) (1 k ) (1 k )

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Introduction Disbursements Collections Concentration of Funds

Payments Fraud


Disbursements

Disbursement Management Products Electronic Disbursement Products Card Payments Outsourced Accounts Payable(A/P)

Services Managing Disbursement Information


Disbursement Management Products

Zero Balance Accounts(ZBAs) Positive Pay Controlled Disbursement Multiple-Drawee Checks

Imprest Accounts


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Electronic Disbursement Products

Direct Deposit (ACH) Payments Tax Payments Wire Transfers


Outsourced A/P Services Freight payments

Payroll services

Integrated or comprehensive A/P

Payment factories

Managing DisbursementInformation

◦ Balance Reporting Svcs

◦ Interface with A/P

◦ Account reconciliationprogram (ARP)

◦ Image technology


Collections

Speed of Collection Security of Payment Availability of Remittance Information Cost of Collection


Key Issues in Collection Systems

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Collection System

© 2015 - The Treasury Academy, Inc. - All Rights Reserved 34Source: ETM3 - © AFP

Typical Collection Process

Invoice Sent to Customer

Customer Sends Payment and Remittance Advice

Vendor Receives and Processes Payment

Cash ApplicationFunds Deposited


Domestic Collection Products Armored Carriers and Virtual Vaults

Merchant Services

Remote Deposit Capture(RDC)

Check Conversion

Mail Payments

Lockbox

Electronic Fund Transfer(EFT) with Remittance Information

Electronic Bill Presentment and Payment(EBPP) and Electronic Invoice Presentment and Payment(EIPP)

Consolidated Remittance Processing(CRP)

Imaging Technology


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Collection Float

Components◦ Mail Float Mail Time

◦ Processing Float Deposit Preparation Time

Impact of RemoteDeposit Capture (RDC)

◦ Availability Float Check Clearing Time

Measurement of Float◦ Dollar-Days


Lockbox Processing Systems Collection tool in which an FI or 3rd party vendor

receives payments at specified post office box addresses, then processes the remittances and credits the payments into a payee’s account.

Advantages of Lockbox Systems◦ Reduced mail & processing float

◦ Improved access to remittance information

◦ Reduced risk and improved security(pmts no longer received internally)

◦ Control and record keepingcapabilities

◦ Uninterrupted service

◦ Scalability

◦ Proper segregation of duties


Different Types of Lockboxes Wholesale◦ Used to process low-volume, large-dollar B2B

payments with detailed remittance information◦ Focus is on float reduction◦ Often manual and/or semi-automated◦ Usually highly customized

Retail ◦ Used to process high-volume, small-dollar consumer

remittances (C2B)◦ Checks are accompanied by standardized, machine-

scannable remittance documents◦ Highly automated◦ Focus is on reducing processing cost

Hybrid◦ Combine features of both


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Cross-Border Collections and Trade Management Products

Open Account Documentary Collection Letter of Credit Banker’s Acceptance (BA) Trade Acceptance Other Trade Payment

Methods◦ Barter◦ Countertrade◦ Trading Companies


Cash Concentration Systems

© 2015 - The Treasury Academy, Inc. - All Rights Reserved 41Source: ETM3 - © AFP

Cash Concentration & Pooling Systems

Global Concentration of Funds◦ Notional pooling◦ Physical pooling◦ Bank overlay structure

Cash Concentration Systems (U.S.)◦ Over-the-counter/Field deposit systems Remote deposit capture (RDC)

Virtual vault services

◦ Cash concentration system configuration Size and geographic distribution of collection system

Transfer alternatives to concentrating bank

Branch footprint of banking network


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Notional Pooling


+

+

++

+

Balances are offset notionally, preserving integrity of accounts No concentration No commingling Interest on the net

pool balance is debited or credited to master account

Notional Pooling Example Assume one country, single currency

Three subsidiaries (A, B, C)

Standard O/D banking accounts◦ Credit (+) balances earn 5%, Debit ( – )balances pay 10%


Subsidiary Average Balance Interest (+/ – )

A + 300 + 15

B – 400 – 40

C + 200 + 10

Summary + 100 – 15

But – If notional pooling is allowed:Company earns net interest of + 5 on master accountAn improvement of + 20 from the non-pooling arrangement


Bank Overlay Structure


Primary BankConcentration Account

In Home Country

Primary Bank BranchOverlay Account

In Country A

Notional Pooling and/or Physical Funds Transfer

Local BankDeposit

Account #1

Local BankDeposit

Account #2

Local BankDeposit

Account #3

Inside Country A

In-country transfers made via best available method –depends on local transfer

options


In Country C

Local BankDeposit

Account #7

Local BankDeposit

Account #8

Local BankDeposit

Account #9

Inside Country C


options


In Country B

Local BankDeposit

Account #4

Local BankDeposit

Account #5

Local BankDeposit

Account #6

Inside Country B


options


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Payments Fraud A major concern for all organizations

Many use positive pay, ACH filters and blocks, and daily reconciliations to help detect and control payments fraud

Some best practices◦ Check stock with security features

◦ Segregation of duties

◦ Dual authentication for EFT transactions

◦ Reduction/elimination of non-repetitive wires

◦ Separate accounts for receipts & disbursements

◦ Dedicated computer for all on-line EFT transactions

Card payment fraud is becoming a bigger issue


Session Wrap-upSession 7: Capital Markets & Cash Management

What did we learn in this session?

What topics do we need to learn more about?


New York Cash Exchange: 2015Essential Learning for CTP Candidates

End of This Session

We will reconvene after Lunch.

The topic will be:

More Key ConceptsCash Forecasting

Risk Management


Documents

Essential Learning for CTP Candidates New York Cash … · 2018-04-14 · Overview of Chapter 6 Topics ... Greater competition among global markets ... (APIC) Book value per