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CTP Exam Preparation Blog

CTP Exam Tips: Performing an Analysis

Jun 6, 2016

By Fred Butterfield, CTP

ButterfieldWhat is an analyst? It is someone who performs analysis. That may just be stating the obvious, but it is also accurate.

Analysis is not just answering the question. For example if the question is, “What generates the greatest yield in short-term investing?” the answer requires far more than just finding the best interest rate.

The questions on the CTP Exam are written to be very specific, and are simple as a result. In the business world, many questions are asked that appear to be as simple, but are not.

In the question above, an analyst would have to determine the answers to several related questions. Here is one question to begin with, possible answers, and some of the steps an analyst might go through to generate a response to the question.

What is the company’s risk appetite?

Some companies will not accept the risk of any investment that may cause a loss of principal, while others will accept the risk but limit the amount of the investment to some fraction of the available cash. Each company is different and the executive team/board of directors is responsible for determining and reviewing the risk appetite for the company on some recurring schedule (annually, every three years, etc.) That risk appetite is communicated to everyone else that needs the information via the investment policy.

A common approach to mitigate this risk is to limit the amount of cash that can be invested in any one type of investment. An example would be a statement something similar to: “Any of the following investments (list of investment types) may be used with an aggregate amount not exceed (some percentage) of available cash as of (statement date).” The analyst would need to be aware of the limitation {not to exceed some percentage} and the evaluation date. They would need to check to make sure that their recommendation was within the guidelines of the investment policy before making it, and if it was close, possibly every period afterwards (if the investment was made) because the limitations could be made a part of the credit covenants with the lending institution.

Once the viable investments have been identified, then each would be examined for their interest rates and whatever other requirements each investment might have to make a final determination.
In short, analysis means looking at all aspects of a question before making a recommendation, not just the quickest answer.

Fred Butterfield, CTP, is a treasury manager based in Denver.