Chapter 20: Short term financing

Which of the following statements about commercial paper is false?

Commercial paper is secured by collateral

Which of the following types of loans will require you to borrow the highest amount in order to obtain the use of $4,000?

discount interest with a 5% compensating balance

Discount interest ______ the effective annual interest rate on a loan while compensating balances ______ it.

increases; increases

The effective annual interest rate of a loan:

is greater than the nominal annual rate if there is compounding more than one time per year

A _______ is an informal agreement between a bank and a borrower listing the limit of lending during the next year, where a _________ is a formal agreement to lend up to a specified level with a fee paid for this service.

line of credit; revolving credit agreement

Which of the following is the type of short-term loan banks most like to make to a borrower with seasonal financing needs?

self-liquidating

Short-term financing is favored because it is cheaper than long-term and readily available. However, there are two disadvantages to short-term debt. They are:

short-term financing must be paid or rolled over quite often and the rates may vary suddenly.

The amount of financing sought is least influenced by which of the following?

the Federal Reserve district where the firm is located

The primary difficulty of relying on short-term credit for continuous financing needs is:

the risk of increasing interest rates

With credit terms of 2/10, n30, the day a business must make a decision day about finding the funds to pay the account or waiting until the end of the net period is the:

10th day

What is the effective cost of an 11%, $100,000 one-year loan that has a compensating balance requirement of 10%?

12.2%

A $10,000, 12% one-year stated rate loan, made on a discount basis, has an annual effective rate of:

13.6%

What is the annual effective cost of trade discounts missed with terms of 1/10, n30?

20.13%

Calculate the effective annual interest rate of foregoing the discount and paying on the 30th day when the terms are 2/cash, n 30. Use a 365-day year:

27.86%

A short-term loan for $100,000, financed at an 8% stated rate, interest and principal paid at the maturity of one year, has an effective annual rate or cost of:

8%

For short-term funding (less than a year), firms usually use all but which of the following?

Bonds

Which one of the following statements about long-term financing versus short-term financing is false?

Long-term financing is generally less expensive than short-term financing.

When a borrower pledges accounts receivable or inventory for a loan, which of following best describes the purpose of the collateral?

The collateral, pledged as security for the loan by the borrower, will be used to pay off the loan if the borrower fails to pay the loan as agreed.

Short-term financing is normally cheaper than long-term financing because it:

Usually has lower interest rates

Which of the following is a major problem with using inventory for collateral for short-term loans?

Valuing the inventory