Deck 8: Sources of Short-Term Financing

Question 1

A compensating balance will be lower in periods of tight money than in periods of credit ease.

Answer 1

False

Question 2

Issuers of commercial paper can be divided into finance companies and industrial or utility firms.

Answer 2

True

Question 3

Small businesses frequently find commercial paper a useful means of obtaining funds when it is not possible to raise funds by other means.

Answer 3

False

Question 4

Commercial paper is an unsecured short-term IOU from a large financially secure company.

Question 5

Monthly instalment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate.

Question 6

A trade discount is a percentage reduction from the invoice price given for purchasing certain minimum quantities.

Question 7

The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.

Question 8

Small companies finance a relatively greater proportion of their assets through trade credit than do larger concerns.

Question 9

On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit.

Question 10

Larger firms tend to be net users of trade credit.

Question 11

Financial institution deregulation has eased competition between banks, trust companies, and foreign financial institutions.

Question 12

Accounts payable is a spontaneous source of funds that grows as the business expands.

Question 13

The largest source of short-term funds for most companies is suppliers (trade credit).

Question 14

Stretching the payment period refers to the practice of trying to take a trade discount after the discount period.

Question 15

Compensating balances represent unfair hidden costs of borrowing.

Question 16

Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate.

Question 17

Although the LIBOR has remained competitive and comparable to the Canadian prime rate, it has remained slightly higher than the prime rate.

Question 18

Compensating balances are a way for banks to recover the cost of corporate services provided, but not directly charged.

Question 19

It is difficult to acquire a loan in Canadian dollars outside Canada.

Question 20

Compensating balances have been important for banks because their existence allows them to make loans at lower quoted rates.

Question 21

Approximately 40% of short-term financing is in the form of accounts payable or trade credit.

Question 22

The prime rate has been tied to market interest rates to better relate the interest rate to banks' cost of funds.

Question 23

In times of tight credit in Canada, Eurodollar loans become difficult to obtain.

Question 24

It is easier for small firms to obtain financing through bank loans than through the commercial paper market.

Question 25

Firms can almost always increase the amount of time they take to pay for purchases without incurring problems.

Question 26

Firms using commercial paper are generally required to maintain bank lines of credit equal to the amount of paper outstanding.

Question 27

The sale of asset-backed securities enables the issuing firm to acquire lower-cost funds than it normally would receive from a bank loan or bond offering.

Question 28

The sale of securities backed by the receivables of large credit worthy firms is a large and growing source of financing.

Question 29

The London Interbank offered rate is used to set a base lending rate for some corporate loans originating in the Euromarkets.

Question 30

The annual effective rate of interest on a loan is a measure that includes the compounding effects on the loan.

Question 31

Eurodollar loans are similar to Canadian bank loans in that they are usually short-term in nature.

Question 32

Even though a firm factors its receivables to a finance company, it is still liable if the account becomes uncollectible.

Question 33

The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30.

Question 34

The movement of the exchange rate can increase the total cost of a loan by making the principal repayment require more money than the original amount of the loan.

Question 35

A cash discount calls for a reduction in price if payment cannot be made within a specified time period.

Question 36

The lender's primary concern is whether the borrower's capacity to generate receivables is sufficient to liquidate the loan as it comes due.

Question 37

One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures.

Question 38

Trade credit is usually extended for periods of one year or more.

Question 39

All commercial paper involves the physical transfer of actual paper certificates.

Question 40

Commercial paper represents secured short-term borrowing by large companies.

Question 41

A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers?

A) decreased receivables and increased bank loans
B) increased receivables and increased bank loans
C) increased payables and decreased bank loans
D) increased payables and increased bank loans

Question 42

The extent to which inventory financing may be used depends on

A) marketability of pledged goods.
B) price stability of goods.
C) how perishable the goods are.
D) all of the other answers are correct

Question 43

Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its chequeing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount.

A) 11.18%
B) 9.5%
C) 15.00%
D) 20.00%

Question 44

One of the disadvantages of commercial paper is that if the company's credit quality declines, the issuance of additional paper may be impossible.

Question 45

Financial managers may prefer the Chicago Board of Trade's financial futures market to the Montreal Futures Exchange because of

A) political uncertainty.
B) the use of U.S. dollars.
C) Chicago is closer to Toronto than Montreal.
D) greater liquidity.

Question 46

What is generally the largest source of short-term credit for small firms?

A) bank loans
B) commercial paper
C) installment loans
D) trade credit

Question 47

Asset-backed securities often have superior credit ratings because of coverage from deposit insurance.

Question 48

In determining the cost of bank financing, which is the important factor?

A) prime rate
B) nominal rate
C) annual rate
D) discount rate

Question 49

Trade credit may be used to finance a major part of the firm's working capital when

A) the firm extends less liberal credit terms than the supplier.
B) the firm extends more liberal credit terms than the supplier.
C) the firm and the supplier both extend the same credit terms.
D) neither the firm nor the supplier extends credit.

Question 50

General Rent-All's officers arrange a $50,000 loan. The company is required to maintain a minimum chequing account balance of 10% of the outstanding loan. This practice is called

A) an instalment loan.
B) a compensating balance.
C) a discounted loan.
D) a balloon payment.

Question 51

The factoring of accounts receivable consists of

A) selling accounts receivable at a profit.
B) pledging accounts receivable as collateral for a loan.
C) selling accounts receivable to raise working capital.
D) buying accounts receivable from a factor.

Question 52

Net credit position refers to

A) the difference between receivables and payables.
B) the difference between receipts and disbursements.
C) the average collection period.
D) the average payment period.

Question 53

The bank rate is determined by

A) the chartered banks.
B) the yield on 91-day Treasury bills.
C) the prime rate.
D) the overnight rate.

Question 54

From the banker's point of view, short-term bank credit is an excellent way of financing

A) capital assets.
B) permanent working capital needs.
C) repayment of long-term debt.
D) seasonal bulges in inventory and receivables.

Question 55

The banks have been significant issuers of asset-backed securities.

Question 56

The commercial paper market is available to all publicly traded companies.

Question 57

In financing accounts receivable, pledging uses receivables _______ while factoring uses receivables _________.

A) as collateral, to purchase
B) as collateral, to sell
C) to sell, as collateral
D) to sell, to purchase

Question 58

LIBOR is

A) a resource used in production.
B) an interest rate paid on Eurodollar deposits in the London market.
C) an interest rate paid by European firms when they borrow Eurodollar deposits from Canadian banks.
D) the interest rate paid by the British government on its long-term bonds.

Question 59

Which of the following is not a characteristic of commercial paper?

A) issued by large firms
B) one-to-two year maturity
C) rates are usually below prime rates on business loans
D) all the answers are commercial paper characteristics

Question 60

Sears Canada Receivables Trust receives a better credit rating than Sears Canada because

A) credit card receivables have a low default rate.
B) the interest rate on receivables is better than a Sears credit card.
C) a trust has the backing of the government through financial legislation.
D) securitization automatically qualifies for a better rating.

Question 61

A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from

A) declining interest rates.
B) rising interest rates.
C) inflation.
D) changes in hedging activities.

Question 62

Mr. Jones borrows $3,000 for 90 days and pays $35 interest. What is his annual rate of interest?

A) 1.2%
B) 4.7%
C) 11.7%
D) none of the other answers are correct

Question 63

Lending disclosure laws are designed to protect

A) corporate borrowers.
B) banks.
C) consumers.
D) investors in corporate bonds.

Question 64

Hedging refers to

A) avoiding high-risk investment opportunities.
B) a transaction that reduces risk exposure.
C) the same thing as asset diversification.
D) avoiding the financial futures market.

Question 65

Analog Computers needs to borrow $800,000 from the Midland Bank. The bank requires a 15% compensating balance. How much money will Analog need to borrow in order to end up with $800,000 spendable cash?

A) $ 920,000
B) $1,058,264
C) $ 941,177
D) none of the other answers are correct

Question 66

Firms exposed to the risk of interest rate changes may reduce that risk by

A) obtaining a Eurodollar loan.
B) hedging in the financial futures market.
C) hedging in the commodities market.
D) pledging or factoring accounts receivable.

Question 67

The prime rate

A) is the rate that banks charge their most creditworthy customers.
B) was over 20% in the early 1980s.
C) is affected by economic and political factors.
D) all of the other answers are correct

Question 68

If Analog computers can borrow at 9.5% for 3 years, what is the annual rate of interest on a $800,000 loan where a 15% compensating balance is required?

A) 11.18%
B) 17.27%
C) 9.50%
D) none of the other answers are correct

Question 69

Commercial paper that is sold without going through a broker or dealer is known as

A) direct paper.
B) dealer paper.
C) book-entry transactions.
D) term paper.

Question 70

Which of the following is not a method for lenders to control pledged inventory?

A) blanket inventory liens
B) trust receipts
C) warehousing
D) factoring

Question 71

The financial futures market

A) is a place in Chicago or Toronto where future stocks are traded.
B) allows for the delivery of financial instruments at a future point in time.
C) is of particular value to small investors in managing their portfolios.
D) two of the other answers are correct

Question 72

Other things being equal, an increase in the number of days that a commercial bank loan is outstanding will mean

A) a reduction in the banks risk
B) an increase in the administration costs.
C) an increase in the dollar amount of the interest.
D) a reduction in the principal amount borrowed.

Question 73

Large firms tend to be

A) net users of trade credit.
B) net suppliers of trade credit.
C) firms with high levels of profitability.
D) firms with low levels of inventory turnover and accounts receivable turnover.

Question 74

Commercial paper has the following advantage.

A) it may be issued below the prime rate
B) it requires no compensating balances
C) it is secured by corporate assets to protect the buyer
D) two of the answers are correct

Question 75

Ms. Smith borrowed $1,250 at a 11% stated rate of interest and was to pay back the loan in 24 monthly payments. What is her annual rate of interest?

A) 10.56%
B) 21.12%
C) 18.96%
D) 22.00%

Question 76

The cost of not taking the discount on trade credit of 3/10, net 30 is equal to

A) 54.75%.
B) 55.67%.
C) 56.44%.
D) 36.50%

Question 77

The prime rate

A) is the annual rate of interest for banks' best customers.
B) changes infrequently
C) is usually lower than treasury bill rates.
D) none of the other answers are correct

Question 78

Bank loans to business firms

A) are usually short-term in nature.
B) are preferred by the banker to be self-liquidating.
C) may require compensating balances.
D) all of the other answers are correct

Question 79

Bank term loans

A) usually carry fixed interest rates.
B) are very short-term in nature.
C) are offered to superior credit applicants.
D) two of the other answers are correct

Question 80

Multinational firms have found that they can lower borrowing costs

A) by borrowing Eurodollars at a lower rate than the Canadian prime rate.
B) by borrowing foreign currencies through foreign subsidiaries at rates lower than the Canadian prime and then converting these foreign loans into dollars.
C) by using more bankers' acceptances.
D) two of the answers are correct