BUSI 320 MOD 4 CHAP 8

Jones company is considering changing its credit term from 30 days to 45 days. If daily credit sales are $3,000 and the balance in accounts payable is $120,000, then as a result of this change, the company's net trade credit position will become:

$15,000

An installment loan usually requires

- payment of accrued interest & part principal. - a series of equal payments.

The risks of commercial paper include:

- possibility of default - potential for a liquidity freeze

A firm borrows $100,000 at 10 percent annual interest plus a 5 percent compensating balance requirement. As a result, the effective interest rate is ___ percent

10.53

Calculate the effective interest rate (APR) on a 6-month loan of $6,000 at a 10-percent interest rate (discount basis)

10.53% Reason: = ($6,000 × 10% × (6 / 12)) / (($6,000 - 300) × (6 / 12)) = 10.53%

Calculate the interest rate with compensating balance given annual interest rate of 20 percent and a compensating balance of 4 percent

20.83 percent

Failing to pay in time to take the cash discount when the terms are 2/10 Net 30 results in an interest rate of approximately

37%

The Truth is Lending Act applies to ___.

Consumer loans

If the bank uses a ___ loan and deducts the interest in advance, the effective rate of interest ___

Discount increases

Compensating balances (do or don't) ___ earn interest

Don't

The sale of accounts receivables to obtain short-term financing is referred to as ___ receivable

Factoring

T/F a 5/10, net 30 cash discount means that the customer will receive 10% discount if they remit funds 5 days after billing

False

T/F in the last decade there has been a sharp decline in the use of the term loan

False

T/F when a firm has a high credit rating, the lender will usually require collateral to secure the loan

False

Jones Company accepts credit cards resulting in outright sale of receivables to credit card company. Which of the following is true regarding this arrangement?

Jones is factoring receivables.

___ is the center of Eurodollar deposits

London

LIBOR stands for ___

London Interbank Offered Rate

Oyster Fields has an average payment period of 21 days as compared to its industry average of 33 days. Suppliers in the industry have a 30-day credit policy. Which one of these statements most applies to Oyster Fields?

Oyster Fields is not maximizing its use of free financing.

Oyster Fields has an average payment period of 30 days. If Oyster Fields increases the average payment period to 60 days, ___

Oyster Fields' credit rating may be diminishing with local credit bureaus

Which is NOT an example of events that cause lenders in commercial paper market to become risk-averse?

Rapid growth of money market mutual funds

When lending slowed in response to the credit crunch of 2007 and 2008, what happened to the economy?

The economy nearly collapsed

The time between the sale and the due date of payment is called:

The payment period

Identify a true statement about self-liquidating loans

They are often used for seasonal financing and for building up inventories.

T/F because there are so many ways to structure loan repayment schedules, no one formula is applicable for computing the APR

True

T/F foreign loan rates are often lower than U.S. loan rates which creates an incentive for US firms to utilize foreign borrowing

True

Jones Corporation is considering borrowing money in a foreign country denominated in the foreign currency and converting it to US funds for use in the USA. What should Jones Co. consider before doing this?

currency risk

Agreements to maintain compensating balances should be ___ in the financial statements.

disclosed

A change in credit terms from 1/10 net 30 to 2/10 net 30 would ___ the effective rate for not taking the cash discount

increase

If a company can increase the payment period to a vendor its cash flow will ___

increase

The relationship between accounts receivable and accounts payable is called

net credit position

A company that has a positive net credit position is considered a ___ of trade credit

net provider

Commercial paper may be issued at below the ___ ___ ___

prime interest rate

Assigning or pledging accounts receivable is used in a

secured borrowing

Commercial paper is backed by

the name and reputation of the issuing company.

To combat inflation, the Federal Reserve sometimes will

tighten the money supply

installment loans can be obtained by a venture ___.

with a track record of sales and profits

Of the following, which one would have the lowest collateral value to a bank or lender?

work in process

Jones Company borrows $125,000 (net) from First National Bank. The bank requires a 20% compensating balance. What is the gross amount of the loan?

$156,250

Jones Company borrows from the bank, using the accounts receivable as security. Which of the following are true of this situation?

- Jones is pledging the receivables - Jones is probably liable if the customer does not pay - Jones still owns the receivables

Jones Company borrows $125,000 from First National Bank. The bank requires a 10% compensating balance. Which of the following are true regarding this loan?

- Jones will pay interest on $125,000 - Jones will have use of $112,500

The assets pledged to secure a loan are called

- Secured assets - collateral

What are some characteristics of commercial paper?

- at least $25,000 - short term - unsecured

Commercial banks use money from their customers' checking accounts to offer ___ that provide short-term financial capital to businesses, and to finance consumer purchases of durable goods such as automobiles

- funds - loans

LIBOR is also used in the pricing of

- money market issues - short-term debt issues by government and corporate borrowers

Some advantages of commercial paper are

- no compensating balance requirement - may have below market interest rate - assets may not be mortgaged

What are true statements about pledging accounts receivable?

- the company pledges its accounts receivable as collateral - the firm is liable for the total amount of the loan

Which of the following statements regarding factoring receivables are correct?

- the factoring firm generally does not have recourses against the seller of the receivable - Factoring a business' receivables is considered one of the more expensive financing methods - the factoring firm is generally paid a fee or commission equal to 1 to 3 percent of the invoices accepted

Credit crunch are the result of the following:

- tightening of money supply growth - increase in interest rates

Asset backed securities

- were responsible for part of the financial crisis of 2007 - are nothing more than the sales of receivables through public offering

The average customer can expect to pay how many points above the prime rate?

1 to 2 percentage points

Ease Mattress needs to raise $200,000 for 6 months. The bank quotes a discount interest rate of 7.5% but does not require compensating balances. What is the effective annual interest rate on this loan?

7.84%

A secured short-term loan that involves either the assignment or factoring of receivables is called ___.

Accounts receivable financing

Companies sometimes convert receivables to cash before they are due. When a company sells its receivables,. It is called ___ (pledging/factoring). When a company uses receivables as collateral for a bank loan, it is called ___ (pledging/factoring)

Blank 1: factoring Blank 2: pledging

A compensating balance requirement is similar to a ___ requirement

Minimum balance

An individual borrows $1,000 from the bank for one year from the bank. The loan requires equal monthly payments. The loan officer states the total interest will be $60. The effective rate on the loan will be

More than 6%

A company that has a higher accounts payable balance than accounts receivable balance is considered a ___ of trade credit

Net user

The normal length of a term loan is

One to seven years

A positive net credit position would indicate that

Receivables are more than payables

In contrast to pledging accounts receivables, when factoring is used, the accounts receivables are ___ to the non-bank company providing the financing.

Sold to

The 1968 Truth in Lending Act was intended to protect:

individual borrowers

Factoring is an arrangement where a firm ______ its receivables.

sells