FI 400 Chapter 16
The cost of borrowing through the sale of commercial paper is typically ________ the prime bank loan rate. A) lower than B) the same as C) unrelated to D) higher than
A
When a firm stretches accounts payable without hurting its credit rating, the cost of foregoing the cash discount is A) reduced. B) increased. C) unaffected. D) immaterial.
A
A ________ is an agreement between a commercial bank and a business that states the maximum amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time, provided sufficient funds are available. A) revolving credit agreement B) line of credit C) short-term self-liquidating loan D) single payment note
B
A field warehouse is A) a warehouse outside the metropolitan area. B) a warehouse on the borrowerʹs premises. C) a central warehouse storing the merchandise of several businesses. D) a warehouse located near the lender.
B
All of the following goods represent appropriate collateral for a secured loan to a school supply manufacturer EXCEPT A) reams or rolls of paper. B) unbound pages. C) notebooks and binders. D) index cards.
B
Commercial paper is usually sold at a discount from A) its cost. B) its par value. C) the prime rate. D) treasury notes.
B
One of the most common designations for the beginning of the credit period is A) 2/10. B) the date of invoice. C) the end of the month. D) the transaction date.
B
Short-term self-liquidating loans are intended to A) finance capital assets. B) cover seasonal peaks in financing caused by inventory and receivables buildup. C) finance merger and/or acquisition activity. D) recapitalize the firm.
B
The two major sources of short-term financing are A) a line of credit and accounts payable. B) accounts payable and accruals. C) a line of credit and accruals. D) accounts receivable and notes payable.
B
.The interest rate charged on secured short-term loans to a corporation is generally higher than that charged on unsecured short-term loans because A) secured loans are less risky than unsecured loans. B) the risk of default is lower on secured loans. C) it is costly to negotiate and administer secured loans. D) lenders of secured loans must pay more for their funds.
C
The effective interest rate generally is A) higher on a loan if interest is paid at maturity. B) lower if the loan is a discount loan. C) higher if the loan is a discount loan. D) not affected by whether the loan is a discount loan or a loan with interest paid at maturity.
C
The major type of loan made by banks to businesses is the A) fixed-asset-based loan. B) short-term secured loan. C) short-term self-liquidating loan. D) capital improvement loan.
C
.In a revolving credit agreement, the firm pays interest on A) the full line of credit. B) the unused portion of the line of credit. C) only the amount actually borrowed. D) the amount actually borrowed and commitment fees on any unused portion of the loan.
D
A ________ is a type of loan made to a business by a commercial bank. This type of loan is made when the borrower needs additional funds for a short period but does not believe the need will continue or reoccur on a seasonal basis. A) revolving credit agreement B) line of credit C) short-term self-liquidating loan D) single payment note
D
A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should A) give up the cash discount, financing the purchase with the line of credit. B) take the cash discount and pay on the 45th day after the date of sale. C) take the cash discount and pay on the first day of the cash discount period. D) take the cash discount, financing the purchase with the line of credit, the cheaper source of funds.
D
Accruals and accounts payable are ________ sources of short-term financing. A) negotiated, secured B) negotiated, unsecured C) spontaneous, secured D) spontaneous, unsecured
D
All of the following goods represent appropriate collateral for a secured loan to a candy manufacturer EXCEPT A) boxes. B) cocoa beans. C) individually wrapped chocolates. D) cream.
D
Appropriate collateral for a loan secured under a floating inventory lien is A) cars. B) drill presses. C) file cabinets. D) paper clips.
D
Loans on which the interest is paid in advance are often called A) premium loans. B) reduced-principle loans. C) called loans. D) discount loans.
D
A short-term self-liquidating loan is a secured short-term loan in which the use to which the borrowed money is put provides the mechanism through which the loan is repaid.
FALSE
A single-payment note is a secured fund which can be obtained from a commercial bank when a borrower needs additional funds for a short period.
FALSE
A trust receipt inventory loan is an arrangement in which the lender receives control of the pledged inventory collateral, which is warehoused by a designated agent.
FALSE
Factoring accounts receivable is a relatively expensive source of unsecured short-term funds.
FALSE
Factoring accounts receivable is a relatively inexpensive source of unsecured short-term funds.
FALSE
Fixed assets are the most desirable short-term loan collateral since they normally have a longer life, or duration, than the term of the loan.
FALSE
For firms that are in a financial position to take a cash discount, it is generally a more financially sound decision not to take the discount if the terms offered are 2/10 net 30.
FALSE
Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this information, the effective annual rate of interest on the commercial paper would be about 4.19 percent.
FALSE
.2.6) If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is reduced.
TRUE
A discount loan is a loan on which interest is paid in advance by deducting it from the loan so that the borrower actually receives less money than is requested.
TRUE
Under a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur in the firmʹs financial condition or operations.
TRUE
Unlike the spontaneous sources of unsecured short-term financing, bank loans are negotiated and result from deliberate actions taken by the financial manager.
TRUE
Lenders require collateral to A) reduce the risk of default. B) control the borrowing firm. C) reduce the losses if the borrower defaults. D) extend to the borrower an unsecured loan.
C
Most commercial paper has maturities ranging from A) six months to one year. B) one year to three years. C) three days to 270 days. D) seven days to 30 days.
C
Most commercial paper is purchased by A) manufacturers. B) governments and individuals. C) banks and life insurers. D) the federal government.
C
Accounts payable are spontaneous secured sources of short-term financing that arise from the normal operations of the firm.
FALSE
Commercial finance companies are lending institutions that make only unsecured loans-both short-term and long-termto businesses.
FALSE
Factoring accounts receivable is a relatively inexpensive source of unsecured short-term funds that allows firms to turn accounts receivable immediately into cash.
FALSE
If possible, it would be a more financially sound decision to pay employees once every two weeks rather than once a month.
FALSE
In pledging accounts receivable, the percentage advanced against the adjusted collateral is determined by the borrower based on its overall evaluation of the quality of the acceptable receivables and the expected cost of their liquidation.
FALSE
Inventory is attractive as collateral since it normally has a market value greater than its book value, which is used to establish its value as collateral.
FALSE
Pledges of accounts receivable are normally made on a notification basis because the lender does not trust the borrower to collect the pledged account receivable and remit these payments as they are received.
FALSE
The interest rate charged on secured short-term loans is typically higher than the rate on unsecured short-term loans.
TRUE
The percentage advance constitutes the principal of the secured loan and varies not only according to the type and liquidity of collateral but also according to the type of security interest being taken.
TRUE
The ________ is the lowest rate of interest charged on business loans to the best business borrowers by the nationʹs leading banks. A) prime rate B) commercial paper rate C) federal funds rate D) treasury bill rate
A
A letter written by a companyʹs bank to the companyʹs foreign supplier, stating that the bank will guarantee payment of an invoiced amount if all the underlying agreements are met is called A) a letter of invoice. B) a letter of intent. C) a letter of credit. D) none of the above.
C
Commercial paper is generally issued in multiples of A) $1,000 or more. B) $10,000 or more. C) $100,000 or more. D) $1,000,000 or more.
C
Financing that arises from the normal operations of the firm is said to be A) expected. B) accrued. C) spontaneous. D) payable.
C
In a line credit arrangement, the firm pays interest on A) the full line of credit. B) the unused portion of the line of credit. C) only the amount actually borrowed. D) only the amount actually borrowed and commitment fees on any unused portion of the loan.
C
The cost of giving up a cash discount on a credit purchase is A) added on to the price of the goods. B) deducted from the price of the goods. C) the implied interest rate paid in order to delay payment for an additional number of days. D) the true purchase price of the goods.
C
________ effectively raises the interest cost to the borrower on a line of credit. A) An operating change restriction B) An annual cleanup C) A compensating balance D) A commitment fee
C
In credit terms, EOM (End-of-Month) indicates that the accounts payable must be paid by the end of the month in which the merchandise has been purchased.
FALSE
Lines of credit are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.
FALSE
Notes payable can be either spontaneous secured or spontaneous unsecured financing and result from the normal operations of the firm.
FALSE
Self-liquidating loans are mainly invested in productive assets (i.e., fixed assets) which provide the mechanism through which the loan is repaid.
FALSE
Spontaneous liabilities such as accounts payable and accruals represent a use of financing that arise from the normal course of business.
FALSE
Spontaneous liabilities such as accounts payable and notes payable represent a source of financing that arise from the normal course of business.
FALSE
Tangshan Mining borrowed $10,000 for one year under a revolving credit agreement that authorized and guaranteed the firm access to $20,000. The revolving credit agreement had a stated interest rate of 8 percent and charged the firm a half percent commitment fee on the unused portion of the agreement. Based on this information, the effective annual interest rate on the loan was 9.50 percent.
FALSE
The discount rate is the lowest rate of interest charged by the nationʹs leading banks on business loans to their most important and reliable business borrowers.
FALSE
The interest rate on a line of credit is normally stated as a fixed rate-the prime rate plus a percent.
FALSE
The outright sale of accounts receivable at a discount in order to obtain funds is called pledging accounts receivable.
FALSE
The prime rate of interest fluctuates with changing supply-and-demand relationships for short-term funds as well as the risk of the bankʹs business borrowers.
FALSE
Under a line of credit agreement, a bank may require an annual cleanup, which means that the borrower must pay off all its outstanding debts to all lenders for a certain number of days during the year.
FALSE
For firms that are able to raise funds through the sale of commercial, it is generally cheaper than if the same firm were to borrow from a commercial bank.
TRUE
For firms that are in a financial position to take a cash discount, it is generally a more financially sound decision to take the discount if the terms offered are 2/10 net 30.
TRUE
If one borrows $1,000 at 8 percent interest on a discount basis, the effective rate of interest is about 8.7 percent.
TRUE
If possible, it would be a more financially sound decision to pay employees once a month rather than once every two weeks.
TRUE
In doing business in foreign countries, financing operations in the local market not only improves the companyʹs business ties to the host community but also minimizes exchange rate risk.
TRUE
In giving up a cash discount, the amount of the discount that is given up is the interest being paid by the firm to keep its money by delaying payment for a number of days.
TRUE
Lines of credit are non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.
TRUE
One advantage of factoring accounts receivable is the ability it gives the firm to turn accounts receivable immediately into cash without having to worry about repayment.
TRUE
Operating change restrictions are contractual restrictions that a bank may impose on a firm as part of a line of credit agreement.
TRUE
Revolving credit agreements are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.
TRUE
Secured short-term financing has specific assets pledged as collateral and appears on the balance sheet as current liabilities.
TRUE
Self-liquidating loans are intended merely to carry the firm through seasonal peaks in financing needs, mainly buildups of accounts receivable and inventory.
TRUE
Spontaneous liabilities such as accounts payable and accruals represent a source of financing that arise from the normal course of business.
TRUE
Tangshan Mining borrowed $10,000 for one year under a line of credit with a stated interest rate of 8 percent and a 10 percent compensating balance. Normally, the firm keeps almost no money in its checking account. Based on this information, the effective annual interest rate on the loan was 8.89 percent.
TRUE
Tangshan Mining borrowed $10,000 for one year under a revolving credit agreement that authorized and guaranteed the firm access to $20,000. The revolving credit agreement had a stated interest rate of 8 percent and charged the firm a half percent commitment fee on the unused portion of the agreement. Based on this information, the effective annual interest rate on the loan was 8.50 percent.
TRUE
Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this information, the effective annual rate of interest on the commercial paper would be about 4.69 percent.
TRUE
The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days.
TRUE
The effective interest rate for a discount loan is greater than the loanʹs stated interest rate.
TRUE
The effective interest rate on a bank loan depends on whether interest is paid when the loan matures or in advance.
TRUE
The interest paid by the issuer of commercial paper is determined by the size of the discount and the length of time to maturity.
TRUE
The major attraction of a line of credit from the bankʹs point of view is that it eliminates the need to examine the credit worthiness of a customer each time it borrows money.
TRUE
The risk to a U.S. importer with foreign-currency-denominated accounts payable is that the dollar will depreciate.
TRUE
A ________ guarantees the borrower that a specified amount of funds will be available regardless of the tightness of money. A) revolving credit agreement B) line of credit C) short-term self-liquidating loan D) single payment note
A
By offering credit to customers, the firm may A) increase the price of the good to cover its costs. B) decrease its investment in accounts receivable. C) decrease its investment in accounts payable. D) decrease the cost of goods purchased.
A
Collateral is typically required for a A) secured short-term loan. B) line of credit. C) short-term self-liquidating loan. D) single payment note.
A
Much of the commercial paper is issued by A) commercial finance companies. B) small businesses. C) venture capitalists. D) small manufacturing firms.
A
Revolving credit agreements are A) guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time. B) non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any one time. C) credit arrangements made in cooperation with suppliers that allows the firms to roll over accounts payable each month. D) none of the above.
A
Seasonal build-ups of inventory and receivables are generally financed with A) short-term loans. B) long-term loans. C) accruals. D) stockholdersʹ equity.
A
The primary source of secured short-term loans to businesses are A) commercial banks and commercial finance companies. B) savings and loans and factors. C) commercial paper dealers and investment bankers. D) life insurance companies and government securities brokers.
A
Appropriate collateral for a secured short-term loan is A) fixed assets. B) raw materials inventory and receivables. C) common stock in a privately-held corporation. D) work-in-process inventory.
B
Commercial banks lend unsecured short-term funds in the following three basic ways. A) Single-payment note, lines of credit, and commercial paper. B) Single-payment note, lines of credit, and revolving credit agreements. C) Single-payment note, revolving credit agreements, and commercial paper. D) Commercial paper, lines of credit, and revolving credit agreements.
B
Lenders recognize that by having an interest in collateral they can reduce losses if the borrowing firm defaults, A) and the presence of collateral reduces the risk of default. B) but the presence of collateral has no impact on the risk of default. C) therefore lenders prefer to lend to customers from whom they are able to require collateral. D) therefore lenders will impose a higher interest rate on unsecured short-term borrowing.
B
Pledges of accounts receivable and factoring of accounts receivable are made on ________ basis, respectively. A) a nonrecourse and a notification B) a nonnotification and a notification C) a notification and a recourse D) a notification and a nonrecourse
B
________ involves the sale of accounts receivable. A) A trust receipt loan B) Factoring C) A field warehouse arrangement D) Pledging of accounts receivable
B
A terminal warehouse is A) a warehouse located at the airport. B) a warehouse on the borrowerʹs premises. C) a central warehouse storing the merchandise of several businesses. D) a warehouse located near the lender.
C
Appropriate collateral for a loan secured under a trust receipt inventory loan is A) drill bits. B) pencils. C) recreation vehicles. D) bananas.
C
Financing that matures in one year or less and has specific assets pledged as collateral is called A) spontaneous financing. B) unsecured short-term financing. C) secured short-term financing. D) none of the above.
C
Compared to a line of credit, a revolving credit agreement generally will be A) a lower cost, higher risk method of short-term borrowing. B) a lower cost, lower risk method of short-term borrowing. C) a higher cost, higher risk method of short-term borrowing. D) a higher cost, lower risk method of short-term borrowing.
D
If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill A) as late as possible. B) as soon as possible. C) before the credit period ends. D) on the last day of the credit period.
D
The interest rate charged on a secured short-term loan to a corporation is typically ________ the interest rate on an unsecured loan. A) lower than B) the same as C) unrelated to D) higher than
D
Which of the following is NOT an advantage of factoring? A) Accounts receivable immediately turned into cash. B) Elimination of credit and collection department. C) Creation of a known pattern of cash flows. D) The effective interest rate.
D
________ are the major source of unsecured short-term financing for business firms. A) Accounts receivable B) Accruals C) Notes payable D) Accounts payable
D
Tangshan Mining borrowed $10,000 for one year under a line of credit with a stated interest rate of 8 percent and a 10 percent compensating balance. Normally, the firm keeps a balance of about $800 in its checking account. Based on this information, the effective annual interest rate on the loan was 8.89 percent.
FALSE
The higher cost of unsecured as opposed to secured borrowing is due to the greater risk of default.
FALSE
The security agreement is the security offered the lender by the borrower, usually in the form of an asset such as accounts receivable or inventory.
FALSE
Under the floating inventory lien, the borrower is free to sell the merchandise and is expected to remit the amount lent against each item, along with accrued interest, to the lender immediately after the sale. The lender then releases the lien on the appropriate item.
FALSE
A floating inventory lien is a lenderʹs claim on the borrowerʹs general inventory as collateral for a secured loan.
TRUE
A floating inventory lien is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise.
TRUE
Commercial banks and other institutions do not normally consider secured loans less risky than unsecured loans, and therefore require higher interest rates on them.
TRUE
Commercial finance companies usually charge a higher interest on secured short-term loans than commercial banks because the finance companies generally end up with higher-risk borrowers.
TRUE
Factoring accounts receivable is a relatively expensive source of secured short-term funds that allows firms to turn accounts receivable immediately into cash.
TRUE
Factoring accounts receivable is not a form of secured short-term borrowing. It entails the sale of accounts receivable at a discount to obtain needed short-term funds.
TRUE
Generally, lenders recognize that holding collateral can reduce losses if the borrower defaults, but the presence of collateral has no impact on the risk of default.
TRUE
Nonrecourse basis is the basis on which accounts receivable are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts.
TRUE
A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has determined that it can stretch the credit period (net period only) by 25 days without damaging its credit standing with the supplier. Assuming the firm needs short-term financing and can borrow from the bank on a line of credit at an interest rate of 14 percent, the firm should A) give up the cash discount and finance the purchase with the line of credit. B) give up the cash discount and pay on the 70th day after the date of sale. C) take the cash discount and pay on the first day of the cash discount period. D) take the cash discount and finance the purchase with the line of credit, the cheaper source of funds.
B
Short-term loans that businesses obtain from banks and through commercial paper are A) negotiated and secured. B) negotiated and unsecured. C) spontaneous and secured. D) spontaneous and unsecured.
B
Short-term self-liquidating loans are intended to A) finance capital assets. B) cover seasonal peaks in financing caused by inventory and receivable buildups. C) finance merger/acquisition activity. D) recapitalize the firm.
B
The prime rate of interest fluctuates with A) the changing supply and demand relationship for long-term funds. B) the changing supply and demand relationship for short-term funds. C) the risk of the firm borrowing the funds. D) demand in the bond market.
B
With a floating-rate note, the interest rate on the note changes A) when the risk level of the borrower changes. B) when the prime rate changes. C) when the demand for loans changes. D) when bank profits change.
B
________ are liabilities for services received for which payment has yet to be made. The most common accounts are taxes and wages. A) Notes payable B) Accruals C) Accounts payable D) Accounts receivable
B
________ ensure that money lent under a line of credit agreement is actually being used to finance seasonal needs. A) Operating change restrictions B) Annual cleanups C) Compensating balances D) Commitment fees
B
________ is a short-term, unsecured promissory note issued by firms with a high credit standing. These notes are primarily issued by commercial finance companies. A) A line of credit B) Commercial paper C) A revolving line of credit D) A self-liquidating loan
B
If one borrows $1,000 at 8 percent interest on a discount basis, the effective rate of interest is about 9.7 percent.
FALSE
If the firm decides to take the cash discount that is offered on goods purchased on credit, the firm should A) pay as soon as possible. B) pay on the last day of the credit period. C) take the discount no matter when the firm actually pays. D) pay on the last day of the discount period.
D
.3.30) Revolving credit agreements are non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.
FALSE
A firm should take the cash discount if the firmʹs cost of borrowing from the bank is greater than the cost of giving up a cash discount.
FALSE
A fixed-rate loan is a loan whose rate of interest is established at a fixed increment above the prime rate and is allowed to vary above prime only when the prime rate varies until maturity.
FALSE
A revolving credit agreement is a form of financing consisting of short-term, unsecured promissory notes issued by firms with a high credit standing.
FALSE
Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing.
FALSE
Generally the increment above the prime rate on a floating-rate loan will be higher than on a fixed-rate loan of equivalent risk because the lender bears higher risk with a floating-rate loan.
FALSE
If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is increased.
FALSE
A compensating balance, which is a required checking account balance equal to a certain percentage of the borrowerʹs short-term unsecured loan, may not only forces the borrower to be a good customer of the bank but may also raise the interest cost to the borrower, thereby increasing the bankʹs earnings.
TRUE
A line of credit is an agreement between a commercial bank and a business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.
TRUE
Accounts payable result from transactions in which merchandise is purchased but no formal note is signed to show the purchaserʹs liability to the seller.
TRUE
Accruals are liabilities for services received for which payment has yet to be made.
TRUE
Although more expensive than a line of credit, a revolving credit agreement can be less risky from the borrowerʹs viewpoint.
TRUE