CCMT – Certified California Municipal Treasurer
| Comprehensive Study Guide, Practice Exam,
Exam Questions & Answers, Exam Prep Test
Bank, Public Finance, Municipal Treasury
Management, Cash & Investment Management,
Budgeting, Debt Management, Financial
Reporting, Risk Management, Government
Accounting, Detailed Rationales, Certification
Success
Question 1: Under California Government Code Section 53646, which of the
following is a mandatory requirement for the annual investment policy review
by the legislative body?
A. Approval by the city attorney only
B. A public hearing with at least 30 days' notice
C. Review and approval of the policy and a resolution affirming the city's investment
strategy
D. Submission to the California Debt and Investment Advisory Commission (CDIAC) for
approval
CORRECT ANSWER: C. Review and approval of the policy and a resolution
affirming the city's investment strategy
Rationale: California Government Code Section 53646 requires the legislative body to
review and approve the investment policy annually and adopt a resolution affirming the
strategy. This ensures that elected officials are actively overseeing public funds. The
other options are not statutory requirements for this specific review.
Question 2: According to the California Government Code, which type of
investment is explicitly prohibited for local agency funds?
A. U.S. Treasury obligations
B. Bankers' acceptances
C. Inverse floaters
D. Commercial paper issued by a domestic corporation
CORRECT ANSWER: C. Inverse floaters
Rationale: Inverse floaters are explicitly prohibited under California Government Code
Section 53601 due to their high volatility and interest rate risk, which makes them
unsuitable for the prudent management of public funds. The other instruments are
permissible under specific conditions and ratings.
Question 3: What is the primary fiduciary duty of a California Municipal
Treasurer regarding the management of public funds?
,A. Maximizing yield at all costs
B. Ensuring liquidity over all other considerations
C. The prudent investor standard, prioritizing safety of principal and liquidity over yield
D. Matching the investment horizon with the highest-yielding bond maturities
CORRECT ANSWER: C. The prudent investor standard, prioritizing safety of
principal and liquidity over yield
Rationale: The "prudent investor" rule, as codified in California law, mandates that a
treasurer must act with care, skill, and caution. The primary objectives are safety of
principal and liquidity, with yield being a tertiary concern. This standard supersedes any
objective of yield maximization.
Question 4: In the context of the Local Agency Investment Fund (LAIF), what
is the maximum amount a single local agency can invest in the fund?
A. No limit
B. $50 million
C. $65 million, adjusted annually for inflation and fund size
D. 10% of the agency's total portfolio
CORRECT ANSWER: C. $65 million, adjusted annually for inflation and fund
size
Rationale: California Government Code Section 16429.1 sets the maximum investment
in LAIF at $65 million per agency, subject to adjustment by the Pooled Money
Investment Board based on inflation and the total size of the fund. This limit ensures
broad participation and prevents any single agency from dominating the pool.
Question 5: Which of the following best describes the role of the California
Debt and Investment Advisory Commission (CDIAC) in relation to municipal
treasurers?
A. They serve as the primary regulator enforcing daily trading activities
B. They provide educational resources, data collection, and advisory services on public
debt and investments
C. They manage the LAIF portfolio directly
D. They approve all individual investment transactions for cities
CORRECT ANSWER: B. They provide educational resources, data collection,
and advisory services on public debt and investments
Rationale: CDIAC was established to provide information, technical assistance, and
education to local agencies regarding public debt issuance and investment practices.
They do not manage funds, approve transactions, or serve as a primary regulator; their
role is advisory and statistical.
Question 6: Under the California Constitution, what is the maximum term for a
direct investment in a security by a local agency, unless specifically authorized
for a longer term?
,A. 2 years
B. 5 years
C. 10 years
D. 30 years
CORRECT ANSWER: B. 5 years
Rationale: Article XVI, Section 6 of the California Constitution restricts local agencies to
investments with a maximum maturity of five years, with exceptions for certain
obligations like bonds issued by the agency itself. This constitutional limitation is a
cornerstone of liquidity management for public entities.
Question 7: A city's investment portfolio has a weighted average maturity
(WAM) of 450 days. Under standard California municipal best practices, this
indicates:
A. A highly liquid portfolio
B. A portfolio that is likely compliant but on the longer end of the spectrum
C. A portfolio that is excessively long and potentially violates the 5-year constitutional
limit
D. A portfolio that is too short and sacrificing yield unnecessarily
CORRECT ANSWER: B. A portfolio that is likely compliant but on the longer
end of the spectrum
Rationale: While the constitutional limit is five years, best practices often recommend a
WAM of less than two years (730 days) to manage interest rate risk. 450 days is well
within the limit, but it suggests the treasurer is extending duration moderately to
enhance yield, which is acceptable as long as it aligns with the policy.
Question 8: Which of the following counterparty criteria is mandated by
California law for investing in commercial paper?
A. The issuer must be incorporated in California
B. The issuer must have a short-term rating of A-1 or higher by a nationally recognized
statistical rating organization (NRSRO)
C. The issuer must have a tangible net worth exceeding $100 million
D. The issuer must have a 10-year track record of profitability
CORRECT ANSWER: B. The issuer must have a short-term rating of A-1 or
higher by a nationally recognized statistical rating organization (NRSRO)
Rationale: Government Code Section 53601 specifically requires that commercial paper
purchased by local agencies have a rating of A-1 or equivalent by an NRSRO (e.g., S&P,
Moody's, Fitch). This ensures the security is of high quality and low credit risk.
Question 9: When managing a portfolio, a treasurer uses "duration" rather
than maturity to assess risk. Duration measures:
, A. The time until the bond matures
B. The price sensitivity of a security to a change in interest rates
C. The legal lifespan of the investment contract
D. The time required to liquidate a security in the secondary market
CORRECT ANSWER: B. The price sensitivity of a security to a change in
interest rates
Rationale: Duration is a weighted average of the present value of cash flows and is used
to estimate how much a bond's price will change given a 100-basis-point shift in yields.
It is a more accurate measure of interest rate risk than simple maturity.
Question 10: Which of the following actions would be considered a violation of
the prohibition against "overtrading" in a public portfolio?
A. Selling a security to realize a loss for tax purposes
B. Engaging in frequent buying and selling that generates excessive commissions and
generates no net benefit to the fund
C. Rebalancing the portfolio on a quarterly basis
D. Selling a security because its credit rating was downgraded below the policy
threshold
CORRECT ANSWER: B. Engaging in frequent buying and selling that generates
excessive commissions and generates no net benefit to the fund
Rationale: Overtrading—also known as "churning"—is prohibited because it incurs
unnecessary transaction costs and broker fees, which erode the yield of the portfolio
without providing a corresponding benefit to the fund or meeting liquidity needs.
Question 11: The "Statement of Investment Policy" for a California
municipality must include all of the following EXCEPT:
A. A list of authorized investments
B. A strategy for achieving maximum yield using derivatives
C. A policy on safekeeping and custody of assets
D. A description of portfolio diversification standards
CORRECT ANSWER: B. A strategy for achieving maximum yield using
derivatives
Rationale: While the investment policy must outline authorized instruments,
diversification, custody, and reporting, it should not focus on yield maximization as a
primary goal. Furthermore, derivatives are generally prohibited or highly restricted, and
the policy must reflect the priority of safety and liquidity.
Question 12: A California city invests in a negotiable certificate of deposit (CD)
from a bank. The primary risk associated with this instrument that
distinguishes it from a non-negotiable CD is:
| Comprehensive Study Guide, Practice Exam,
Exam Questions & Answers, Exam Prep Test
Bank, Public Finance, Municipal Treasury
Management, Cash & Investment Management,
Budgeting, Debt Management, Financial
Reporting, Risk Management, Government
Accounting, Detailed Rationales, Certification
Success
Question 1: Under California Government Code Section 53646, which of the
following is a mandatory requirement for the annual investment policy review
by the legislative body?
A. Approval by the city attorney only
B. A public hearing with at least 30 days' notice
C. Review and approval of the policy and a resolution affirming the city's investment
strategy
D. Submission to the California Debt and Investment Advisory Commission (CDIAC) for
approval
CORRECT ANSWER: C. Review and approval of the policy and a resolution
affirming the city's investment strategy
Rationale: California Government Code Section 53646 requires the legislative body to
review and approve the investment policy annually and adopt a resolution affirming the
strategy. This ensures that elected officials are actively overseeing public funds. The
other options are not statutory requirements for this specific review.
Question 2: According to the California Government Code, which type of
investment is explicitly prohibited for local agency funds?
A. U.S. Treasury obligations
B. Bankers' acceptances
C. Inverse floaters
D. Commercial paper issued by a domestic corporation
CORRECT ANSWER: C. Inverse floaters
Rationale: Inverse floaters are explicitly prohibited under California Government Code
Section 53601 due to their high volatility and interest rate risk, which makes them
unsuitable for the prudent management of public funds. The other instruments are
permissible under specific conditions and ratings.
Question 3: What is the primary fiduciary duty of a California Municipal
Treasurer regarding the management of public funds?
,A. Maximizing yield at all costs
B. Ensuring liquidity over all other considerations
C. The prudent investor standard, prioritizing safety of principal and liquidity over yield
D. Matching the investment horizon with the highest-yielding bond maturities
CORRECT ANSWER: C. The prudent investor standard, prioritizing safety of
principal and liquidity over yield
Rationale: The "prudent investor" rule, as codified in California law, mandates that a
treasurer must act with care, skill, and caution. The primary objectives are safety of
principal and liquidity, with yield being a tertiary concern. This standard supersedes any
objective of yield maximization.
Question 4: In the context of the Local Agency Investment Fund (LAIF), what
is the maximum amount a single local agency can invest in the fund?
A. No limit
B. $50 million
C. $65 million, adjusted annually for inflation and fund size
D. 10% of the agency's total portfolio
CORRECT ANSWER: C. $65 million, adjusted annually for inflation and fund
size
Rationale: California Government Code Section 16429.1 sets the maximum investment
in LAIF at $65 million per agency, subject to adjustment by the Pooled Money
Investment Board based on inflation and the total size of the fund. This limit ensures
broad participation and prevents any single agency from dominating the pool.
Question 5: Which of the following best describes the role of the California
Debt and Investment Advisory Commission (CDIAC) in relation to municipal
treasurers?
A. They serve as the primary regulator enforcing daily trading activities
B. They provide educational resources, data collection, and advisory services on public
debt and investments
C. They manage the LAIF portfolio directly
D. They approve all individual investment transactions for cities
CORRECT ANSWER: B. They provide educational resources, data collection,
and advisory services on public debt and investments
Rationale: CDIAC was established to provide information, technical assistance, and
education to local agencies regarding public debt issuance and investment practices.
They do not manage funds, approve transactions, or serve as a primary regulator; their
role is advisory and statistical.
Question 6: Under the California Constitution, what is the maximum term for a
direct investment in a security by a local agency, unless specifically authorized
for a longer term?
,A. 2 years
B. 5 years
C. 10 years
D. 30 years
CORRECT ANSWER: B. 5 years
Rationale: Article XVI, Section 6 of the California Constitution restricts local agencies to
investments with a maximum maturity of five years, with exceptions for certain
obligations like bonds issued by the agency itself. This constitutional limitation is a
cornerstone of liquidity management for public entities.
Question 7: A city's investment portfolio has a weighted average maturity
(WAM) of 450 days. Under standard California municipal best practices, this
indicates:
A. A highly liquid portfolio
B. A portfolio that is likely compliant but on the longer end of the spectrum
C. A portfolio that is excessively long and potentially violates the 5-year constitutional
limit
D. A portfolio that is too short and sacrificing yield unnecessarily
CORRECT ANSWER: B. A portfolio that is likely compliant but on the longer
end of the spectrum
Rationale: While the constitutional limit is five years, best practices often recommend a
WAM of less than two years (730 days) to manage interest rate risk. 450 days is well
within the limit, but it suggests the treasurer is extending duration moderately to
enhance yield, which is acceptable as long as it aligns with the policy.
Question 8: Which of the following counterparty criteria is mandated by
California law for investing in commercial paper?
A. The issuer must be incorporated in California
B. The issuer must have a short-term rating of A-1 or higher by a nationally recognized
statistical rating organization (NRSRO)
C. The issuer must have a tangible net worth exceeding $100 million
D. The issuer must have a 10-year track record of profitability
CORRECT ANSWER: B. The issuer must have a short-term rating of A-1 or
higher by a nationally recognized statistical rating organization (NRSRO)
Rationale: Government Code Section 53601 specifically requires that commercial paper
purchased by local agencies have a rating of A-1 or equivalent by an NRSRO (e.g., S&P,
Moody's, Fitch). This ensures the security is of high quality and low credit risk.
Question 9: When managing a portfolio, a treasurer uses "duration" rather
than maturity to assess risk. Duration measures:
, A. The time until the bond matures
B. The price sensitivity of a security to a change in interest rates
C. The legal lifespan of the investment contract
D. The time required to liquidate a security in the secondary market
CORRECT ANSWER: B. The price sensitivity of a security to a change in
interest rates
Rationale: Duration is a weighted average of the present value of cash flows and is used
to estimate how much a bond's price will change given a 100-basis-point shift in yields.
It is a more accurate measure of interest rate risk than simple maturity.
Question 10: Which of the following actions would be considered a violation of
the prohibition against "overtrading" in a public portfolio?
A. Selling a security to realize a loss for tax purposes
B. Engaging in frequent buying and selling that generates excessive commissions and
generates no net benefit to the fund
C. Rebalancing the portfolio on a quarterly basis
D. Selling a security because its credit rating was downgraded below the policy
threshold
CORRECT ANSWER: B. Engaging in frequent buying and selling that generates
excessive commissions and generates no net benefit to the fund
Rationale: Overtrading—also known as "churning"—is prohibited because it incurs
unnecessary transaction costs and broker fees, which erode the yield of the portfolio
without providing a corresponding benefit to the fund or meeting liquidity needs.
Question 11: The "Statement of Investment Policy" for a California
municipality must include all of the following EXCEPT:
A. A list of authorized investments
B. A strategy for achieving maximum yield using derivatives
C. A policy on safekeeping and custody of assets
D. A description of portfolio diversification standards
CORRECT ANSWER: B. A strategy for achieving maximum yield using
derivatives
Rationale: While the investment policy must outline authorized instruments,
diversification, custody, and reporting, it should not focus on yield maximization as a
primary goal. Furthermore, derivatives are generally prohibited or highly restricted, and
the policy must reflect the priority of safety and liquidity.
Question 12: A California city invests in a negotiable certificate of deposit (CD)
from a bank. The primary risk associated with this instrument that
distinguishes it from a non-negotiable CD is:
