Sources of Short-Term Financing

False

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

increase

1. 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.

net user

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

net provider

1. A company that has a positive net credit position is considered a ______ of trade credit.

Minimum Balance

1. A compensating balance requirement is similar to a ______ requirement.

receivables are more than payables

1. A positive net credit position would indicate that:

Loans; Funds

1. 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.

lower than

1. From 1997 to 2012 the LIBOR rate has usually been ______ the prime rate.

$156,250

1. 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?

Consumer loans

1. The Truth in Lending Act applies to ______.

the payment period

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

Trade credit is usually extended for:

30-60 days

Loan Payable

A company that secures a loan from a financial institution by pledging accounts receivable balances as collateral will recognize a ______ ______ in the financial statements.

minimum balance

A compensating balance requirement is similar to a ______ requirement.

10.53

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.

accounts receivable financing

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

With; Without

Accounts receivable sold with the risk of nonpayment by customers assumed by the transferor of the receivables is a sale _____ recourse; whereas, receivables sold with the risk of nonpayment assumed by the transferee is a sale _____ recourse.

disclosed

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

More than 6%

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:

- Payment of accrued interest & part principal. - A series of equal payments.

An installment loan usually requires:

floor planning

Another name for trust receipt financing is:

Secured borrowing

Assigning or pledging accounts receivable is used in a:

10.53%

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

20.83%

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

money markets

Commercial paper is traded in the ______.

Prime interest rate

Commercial paper may be issued at below the ____ ____ ____.

Factoring; Pledging

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).

Don't

Compensating balances (do or don't) _____ earn interest.

- Tightening of money supply growth. - Increase in interest rates.

Credit crunch are the result of the following:

more than

During tight money periods most banks charge ______ the prime rate.

7.79%

Ezze 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?

37%

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:

Discounted; increases

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

Sold to

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

with a track record of sales and profits.

Installment loans can be obtained by a venture ______.

Jones is factoring receivables.

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

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

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

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

Currency risk

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?

Work in process

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

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

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

1. 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.

warehousing

The arrangement where goods can only be moved with permission of the lender is called:

a. 1-2 percentage points

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

one to seven years

The normal length of a term loans is:

the prime rate

The rate a bank charges to its most creditworthy customers is:

factoring

The sale of accounts receivables to obtain short-term financing is referred to as ______ receivables.

Cash for $9,500

Tricon Co. sells $10,000 of its accounts receivable and is charged a 5% factoring fee. It records this sale with a debit to:

True

True or False: Foreign loan rates are often lower than U.S. loan rates which creates an incentive for US firms to utilize foreign borrowing.

False

True or False: Goods in process used as collateral typically qualify a firm for a higher loan than raw material or finished goods.

False

True or False: Selling a Treasury bond futures contract will result in a profit if interest rates go down.

True

True or False: The method of controlling pledged inventory in which the lender has a general claim on the borrower's inventory is called a blanket inventory lien.

False

True or False: When a firm has a high credit rating, the lender will usually require collateral to secure the loan.

True

True or false: Because there are so many ways to structure loan repayment schedules, no singular formula is applicable for computing the APR.

False

True or false: In the last decade there has been a sharp decline in the use of the term loan.

- Unsecured - At least $25,000 - Short term

What are some characteristics of commercial paper?

a. The firm is liable for the total amount of the loan; The company pledges its accounts receivable as collateral.

What are true statements about pledging accounts receivable?

The economy nearly collapsed.

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

Rapid growth of money market mutual fund.

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

a. The transferor seems less leveraged. b. The transferor seems more liquid. c. The transferor seems more profitable.

Which of the following are reasons why a transferor prefers the sale approach over the secured borrowing approach of transferring receivables? (Select all that apply.)

a. Lender has lien on all inventory. b. Lender has lien on inventory obtained after loan is made. c. Specific inventory items are not identified.

Which of the following is true regarding blanket inventory liens?

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

Which of the following statements regarding factoring receivables are correct?

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

Which of the following statements regarding factoring receivables are correct?

Large banks and corporations

Who offers commercial paper loans?

What does LIBOR indicate?

a. It is the rate that most international banks charge one another for dollar denominated loans in the London market.

Asset backed securities

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

Hedging is used to:

reduce a prior risk exposure.

net credit position

the relationship between accounts receivable and accounts payable.