Short-term Financing

A. Compensating balance

209. A minimum checking account balance that a firm must maintain with a commercial bank is a A. Compensating balance C. Speculative balance B. Precautionary balance D. Transaction balance

D. Compensates a financial institution for services rendered by providing it with deposits of funds .

A compensating balance A. Is the amount of prepaid interest on a loan B. Is used to compensate for possible losses on a marketable securities portfolio C. Is a level of inventory held to compensate for variations in usage rate and lead time D. Compensates a financial institution for services rendered by providing it with deposits of funds .

B. may be required in lieu of a fee for bank services .

A compensating balance A. can be held in the form of a banker's acceptance . B. may be required in lieu of a fee for bank services . C. earns interest at the same rate as a saving deposit . D. increases the effective rate of return on savings account .

C. sells approved accounts receivable without recourse .

A firm which finances through a factor A. maintains a compensating balance . B. uses inventory as collateral for a loan . C. sells approved accounts receivable without recourse . D. uses another company to endorse or guarantee a loan .

B. a line - of - credit .

A small retail business would most likely finance its merchandise inventory with A. a chattel mortgage . C. a terminal warehouse receipt loan . B. a line - of - credit . D. commercial paper .

D. Trade credit

A. Advances by owners C. Factoring B. Commercial bank loan D. Trade credit

C. A warehouse receipt

An example of secured short - term financing is : A. A line of credit C. A warehouse receipt B. A revolving credit line D. Commercial paper

D. most competitors are offering the same terms , and the organization has a shortage of cash .

An organization would usually offer credit terms of 2/10 , net 30 when A. the cost of capital approaches the prime rate . B. the organization can borrow funds at a rate less than the annual interest cost . C. the organization can borrow funds at a rate exceeding the annual interest cost D. most competitors are offering the same terms , and the organization has a shortage of cash .

C. Ordinarily does not have an active secondary market .

Commercial paper A. Has a maturity date of greater than 1 year . B. Has an interest rate lower than Treasury bills . C. Ordinarily does not have an active secondary market D. Is usually sold only through investment banking dealers .

D. interest costs are lower than the interest on ordinary bank loans and compensating balances are not required of borrowers

Commercial paper tends to be quite popular with large , profitable corporation because A. the market distribution for commercial paper is very narrow B. purchasers of the commercial paper typically use this type of investment on a long term basis C. even though interest costs are higher than the interest on ordinary bank loans , the interest is tax deductible D. interest costs are lower than the interest on ordinary bank loans and compensating balances are not required of borrowers

C. stretching payables

Common sources of short - term financing include A. issuing bonds C. stretching payables B. reducing inventory D. all of the given choices

A. pledged inventory is not removed from the borrower's property to another specific location .

From the viewpoint of a borrower , a field warehouse arrangement is frequently considered superior to a terminal ( public ) warehouse arrangement because A. pledged inventory is not removed from the borrower's property to another specific location . B. pledged inventory can be released to the borrower in cases of emergency without authorization from the lender . C. a warehouse person is required for a public warehouse arrangement , but no supervision is required for a field warehouse . D. insurance does not have to be carried on the inventory when a field warehousing

A. WIP generally has the lowest marketability of the various types of inventories

In assessing the loan value of an inventory , a banker will normally be concerned about the portion of inventory that is work - in - process because A. WIP generally has the lowest marketability of the various types of inventories B. WIP inventory usually has the highest loan value of the different inventory types C. WIP represents lower investments by a corporation as opposed to other types of inventories D. WIP inventory is relatively easy to sell because it does not represent a raw material or a finished product

D. all of the above

Inventory financing can take the form of a A. blanker lien . C. warehouse receipt . B. trust receipt D. all of the above

C. With trade terms of 2/15 , net 60 , if the discount is taken the buyer receives 45 days of free credit

On cash discounts , all of the following statements do not apply except A. The cost of not taking a cash discount is always higher than the cost of a bank loan . B. The cost of not taking the discount is higher for terms of 2/10 , net 60 than for 2/10 , net 30 . C. With trade 1 free credit . terms of 2/15 , net 60 , if the discount is taken the buyer receives 45 days of D. If a firm buys P10,000,00 of goods on terms of 1/10 , net 30 and pays within the discount period , the amount paid would be 9,000 .

A. Usually lower than long - term rates

Short - term interest rates are A. Usually lower than long - term rates B. Usually higher than long - term rates C. Not significantly related to long - term rates D. Lower than long - term rates during periods of high inflation only

A. Is a timed draft payable on a specified date and guaranteed by the bank

The credit instrument known as banker's acceptance A. Is a timed draft payable on a specified date and guaranteed by the bank B. Is a method of sales financing in which the bank retains title to the goods until the buyer has completed payment C. Calls for immediate payment upon delivery of the shipping documents to the bank's customer and acceptance of goods by the bank . D. Involves an invoice being signed by the banker upon receipt of goods , after which both the banker and seller record the transaction on their respective goods .

A. The monthly cash budget

The most appropriate tool for determining in what month a short - term bank loan can be repaid is A. The monthly cash budget B. The asset turnover for the month C. The earning as a percent of sales for the month D. The monthly Statement of Changes in Financial Position

D. the effective borrowing costs will be higher than if the compensating balance were not required .

The net effect of a compensating balance requirement on a loan from the viewpoint of the borrower is A. the compensating balance has no effect on financing costs . B. the compensating balance will seldom be used if the loan maturity is less than 5 years . C. the effective borrowing costs will be lower than if the compensating balance were not required . D. the effective borrowing costs will be higher than if the compensating balance were not required .

D. The imposition of a compensating balance with an absolute minimum that cannot be met by current transaction balances .

The prime lending rate of commercial banks is an announced rate and is often understated from the viewpoint of even the most credit - worthy firms . Which one of the following requirements always results in a higher effective interest rate ? A. A floating rate for the loan period . B. The absence of a charge for any unused portion in the line of credit . C. A covenant that restricts the issuance of any new unsecured bonds during the existence of the loan . D. The imposition of a compensating balance with an absolute minimum that cannot be met by current transaction balances .

D. Rate charged on business loans to borrowers with high credit ratings

The prime rate is the A. Effective cost of a commercial bank loan B. Size of the commitment fee on a commercial bank loan C. Rate at which a bank borrows from the Bangko Sentral ng Pilipinas D. Rate charged on business loans to borrowers with high credit ratings

D. is generally cheaper than a commercial bank loan .

The principal advantage of using commercial paper as a short - term financing instrument is that it A. offers security , i.e. , collateral , to the lender . B. is readily available to & most all companies . C. can be purchased without commission costs . D. is generally cheaper than a commercial bank loan .

B. the accounts receivable are sold outright to a financial institution .

The principal difference between factoring and pledging receivables rests in the fact that in factoring A. the accounts receivable are pledged on a non - notification basis . B. the accounts receivable are sold outright to a financial institution . C. the accounts receivable are merely pledged as security for a loan D. the financial institution factoring the accounts reserves the right to substitute newer receivables for those accounts that appear difficult to collect

D. Trade credit

Which of the following financial instruments generally provides the largest source of short term credit for small firms ? A. Commercial paper C. Mortgage bonds B. Installment loans D. Trade credit

B. Chattel mortgage

Which of the following forms of short - term borrowing is a secured credit ? A. Banker's acceptance C. Commercial paper B. Chattel mortgage D. Line of credit

A. Trade credit usually bears no interest , so it is costless .

Which of the following is incorrect ? A. Trade credit usually bears no interest , so it is costless . B. Pledging of receivables is an example of secured short - term credit C. When a firm purchases goods or services on credit from a supplier , it automatically obtains short - term financing . D. Accruals or accrued expenses is a form of spontaneous financing which represents liabilities for services that have been provided to the company but have not been paid for

B. common stock

Which of the following is not a source of short - term credit ? A. accruals C. deferred income B. common stock D. purchases on account

A. Commercial paper can be issued by virtually all firms .

Which of the following statements concerning commercial paper is false ? A. Commercial paper can be issued by virtually all firms . B. Commercial paper is generally written for terms less than 270 days . C. Commercial paper generally carries an interest rate below the prime rate . D. Commercial paper is sold to money market mutual funds , as well as to other financial institutions and non - financial corporations .

A. Accounts payable

Which one of the following provides a spontaneous source of financing for a firm ? A. Accounts payable C. Debentures B. Accounts receivable D. Mortgage bonds

C. There are no restrictions as to the type of corporation that can enter into the market

Which one of the following responses is not an advantage to a corporation that uses the commercial paper market for short - term financing ? A. This market provides a broad distribution for borrowing . B. This market provides more funds at lower rates than other methods provide . C. There are no restrictions as to the type of corporation that can enter into the market . D. The borrower avoids the expense of maintaining a compensating balance with a commercial bank .

A. Subject to risk of buyer default

Which one of the following statements about trade credit is correct ? A. Subject to risk of buyer default B. A source of long - term financing to the seller C. Not an important source of financing for small firms D. Usually an inexpensive source of external financing

D. The 8th day is the customer's decision date .

With credit terms of 3/8 , n / 30 , what is the customer's payment decision date ? A. Three days after the invoice is received . B. Anytime during the period , 8th to the 30th . C. The 30th day is the primary decision date . D. The 8th day is the customer's decision date .