FIN3703
Assignment 1
(COMPLETE
ANSWERS) Semester
1 2025
,QUESTION 1 (2) – Treasury Management Functions
Treasury management is an essential function in any business, regardless of its size, structure, or
industry. The corporate treasury department is responsible for managing a company's liquidity, cash
flow, financial risks, and investment decisions. The core treasury functions include:
1. Cash and Liquidity Management – Ensuring that a company has enough cash to meet its
short-term obligations while optimizing cash surpluses.
2. Banking Relations – Managing relationships with banks and financial institutions to facilitate
transactions, secure financing, and optimize banking services.
3. Financial Risk Management – Identifying and mitigating financial risks such as interest rate
risk, foreign exchange risk, and credit risk.
4. Capital Structure and Dividend Policy – Deciding how a company finances its operations
through debt and equity and determining dividend payout policies.
Analyzing the Options:
Option (a): The management of cash, liquidity, and banking relations – This is a core function
of corporate treasury management.
Option (b): The management of the cost of capital, capital structure, and dividend payout –
This falls under corporate finance rather than treasury management. Corporate finance deals
with long-term financial strategy, investment decisions, and how the company is funded.
Option (c): The management of financial, operational, and strategic risks – Treasury
management primarily focuses on financial risks (e.g., interest rate, currency, and credit
risks). However, operational and strategic risks are broader categories that typically fall
under enterprise risk management rather than treasury.
Option (d): Management of cash forecasting, cash surpluses, and cash deficits – This is a key
function of treasury management.
Correct Answer:
The activities that do not fall directly under treasury management are (b) and (c) because:
Cost of capital, capital structure, and dividend payout are primarily handled by corporate
finance rather than treasury.
Operational and strategic risks are broader risks managed at the enterprise level rather than
within treasury.
,Correct Option: 3 (b and c).
QUESTION 2 (2) – Interest Rate Swaps
An interest rate swap (IRS) is a financial derivative contract between two counterparties who agree
to exchange interest payments on a specified principal amount over a defined period. The most
common type of interest rate swap involves exchanging:
A floating interest rate (which changes over time, typically based on benchmark rates like
LIBOR or SOFR)
For a fixed interest rate (which remains constant throughout the contract duration).
Companies and investors use interest rate swaps for:
1. Risk Management – Hedging against interest rate fluctuations.
2. Lowering Borrowing Costs – Converting debt obligations to more favorable interest rate
structures.
3. Speculation – Investors may use swaps to speculate on interest rate movements.
Analyzing the Options:
Option (a): A floating rate commitment for a fixed rate – ✅ Correct. This is the most
common use of an interest rate swap, where one party pays a fixed rate and receives a
floating rate (or vice versa).
Option (b): Long-term debt for equity – ❌ Incorrect. Interest rate swaps do not involve
exchanging long-term debt for equity. This is more related to capital restructuring or
convertible bonds.
Option (c): Short-term debt for long-term debt – ❌ Incorrect. Interest rate swaps do not
involve restructuring debt maturities; they are about exchanging interest payments.
Option (d): Fixed assets with current assets – ❌ Incorrect. Interest rate swaps deal with
interest payments, not asset exchanges.
Correct Answer:
The only correct choice is (a) since interest rate swaps involve exchanging floating and fixed interest
rates.
, Correct Option: 1 (a).
Final Answers:
✅ Question 1 Answer: 3 (b and c)
✅ Question 2 Answer: 1 (a)
QUESTION 3 (2) – Interest Payable by Gauteng Subsidiary
The Gauteng subsidiary has been informed that it must finance its cash deficit using a revolving
credit from Capitec Bank. The key details provided are:
Loan Amount (Deficit): R350,000
Interest Rate: 10% per annum
Loan Duration: 29 days
Interest is calculated daily (using 365 days in a year)
Formula for Daily Interest Calculation:
Interest Payable=Principal×Rate×Time in Days365\text{Interest Payable} = \text{Principal} \times
\text{Rate} \times \frac{\text{Time in Days}}{365}Interest Payable=Principal×Rate×365Time in Days
Substituting the values:
Interest Payable=350,000×10%×29365\text{Interest Payable} = 350,000 \times 10\% \times
\frac{29}{365}Interest Payable=350,000×10%×36529 =350,000×0.10×0.07945= 350,000 \times 0.10
\times 0.07945=350,000×0.10×0.07945 =350,000×0.007945= 350,000 \times
0.007945=350,000×0.007945 =2,780.75= 2,780.75=2,780.75
Final Answer:
✅ The interest payable by the Gauteng subsidiary for 29 days is R2,780.75.
Assignment 1
(COMPLETE
ANSWERS) Semester
1 2025
,QUESTION 1 (2) – Treasury Management Functions
Treasury management is an essential function in any business, regardless of its size, structure, or
industry. The corporate treasury department is responsible for managing a company's liquidity, cash
flow, financial risks, and investment decisions. The core treasury functions include:
1. Cash and Liquidity Management – Ensuring that a company has enough cash to meet its
short-term obligations while optimizing cash surpluses.
2. Banking Relations – Managing relationships with banks and financial institutions to facilitate
transactions, secure financing, and optimize banking services.
3. Financial Risk Management – Identifying and mitigating financial risks such as interest rate
risk, foreign exchange risk, and credit risk.
4. Capital Structure and Dividend Policy – Deciding how a company finances its operations
through debt and equity and determining dividend payout policies.
Analyzing the Options:
Option (a): The management of cash, liquidity, and banking relations – This is a core function
of corporate treasury management.
Option (b): The management of the cost of capital, capital structure, and dividend payout –
This falls under corporate finance rather than treasury management. Corporate finance deals
with long-term financial strategy, investment decisions, and how the company is funded.
Option (c): The management of financial, operational, and strategic risks – Treasury
management primarily focuses on financial risks (e.g., interest rate, currency, and credit
risks). However, operational and strategic risks are broader categories that typically fall
under enterprise risk management rather than treasury.
Option (d): Management of cash forecasting, cash surpluses, and cash deficits – This is a key
function of treasury management.
Correct Answer:
The activities that do not fall directly under treasury management are (b) and (c) because:
Cost of capital, capital structure, and dividend payout are primarily handled by corporate
finance rather than treasury.
Operational and strategic risks are broader risks managed at the enterprise level rather than
within treasury.
,Correct Option: 3 (b and c).
QUESTION 2 (2) – Interest Rate Swaps
An interest rate swap (IRS) is a financial derivative contract between two counterparties who agree
to exchange interest payments on a specified principal amount over a defined period. The most
common type of interest rate swap involves exchanging:
A floating interest rate (which changes over time, typically based on benchmark rates like
LIBOR or SOFR)
For a fixed interest rate (which remains constant throughout the contract duration).
Companies and investors use interest rate swaps for:
1. Risk Management – Hedging against interest rate fluctuations.
2. Lowering Borrowing Costs – Converting debt obligations to more favorable interest rate
structures.
3. Speculation – Investors may use swaps to speculate on interest rate movements.
Analyzing the Options:
Option (a): A floating rate commitment for a fixed rate – ✅ Correct. This is the most
common use of an interest rate swap, where one party pays a fixed rate and receives a
floating rate (or vice versa).
Option (b): Long-term debt for equity – ❌ Incorrect. Interest rate swaps do not involve
exchanging long-term debt for equity. This is more related to capital restructuring or
convertible bonds.
Option (c): Short-term debt for long-term debt – ❌ Incorrect. Interest rate swaps do not
involve restructuring debt maturities; they are about exchanging interest payments.
Option (d): Fixed assets with current assets – ❌ Incorrect. Interest rate swaps deal with
interest payments, not asset exchanges.
Correct Answer:
The only correct choice is (a) since interest rate swaps involve exchanging floating and fixed interest
rates.
, Correct Option: 1 (a).
Final Answers:
✅ Question 1 Answer: 3 (b and c)
✅ Question 2 Answer: 1 (a)
QUESTION 3 (2) – Interest Payable by Gauteng Subsidiary
The Gauteng subsidiary has been informed that it must finance its cash deficit using a revolving
credit from Capitec Bank. The key details provided are:
Loan Amount (Deficit): R350,000
Interest Rate: 10% per annum
Loan Duration: 29 days
Interest is calculated daily (using 365 days in a year)
Formula for Daily Interest Calculation:
Interest Payable=Principal×Rate×Time in Days365\text{Interest Payable} = \text{Principal} \times
\text{Rate} \times \frac{\text{Time in Days}}{365}Interest Payable=Principal×Rate×365Time in Days
Substituting the values:
Interest Payable=350,000×10%×29365\text{Interest Payable} = 350,000 \times 10\% \times
\frac{29}{365}Interest Payable=350,000×10%×36529 =350,000×0.10×0.07945= 350,000 \times 0.10
\times 0.07945=350,000×0.10×0.07945 =350,000×0.007945= 350,000 \times
0.007945=350,000×0.007945 =2,780.75= 2,780.75=2,780.75
Final Answer:
✅ The interest payable by the Gauteng subsidiary for 29 days is R2,780.75.
