Question 1

Self-liquidating loans are mainly invested in productive assets (i.e.,fixed assets)which provide the mechanism through which the loan is repaid.

Accepted Answer

Self-liquidating loans are typically used to finance current assets, such as inventory or accounts receivable, which are sold or converted into cash to repay the loan, rather than fixed assets.

Question 2

The prime rate of interest fluctuates with changing supply-and-demand relationships for short-term funds.

Accepted Answer

The prime rate is indeed affected by changes in supply and demand for short-term funds.

Question 3

The major attraction of a line of credit from the bank's point of view is that it eliminates the need to examine the creditworthiness of a customer each time it borrows money within the year.

Accepted Answer

A line of credit enables a customer to borrow money within a certain limit and timeframe, without needing to go through the process of applying for a loan each time. The bank evaluates the customer's creditworthiness at the beginning of the credit line, and if the customer maintains a good credit rating, they can use the line of credit without further evaluation. This makes it easier and more convenient for the customer to obtain credit, and reduces the administrative burden on the bank.

Question 4

The interest rate on a line of credit is normally stated as a fixed rate-the prime rate.

Accepted Answer

The interest rate on a line of credit is typically stated as the prime rate plus a margin based on the borrower's creditworthiness. This means that the interest rate can fluctuate as the prime rate changes.

Question 5

Compensating balance is a checking account balance equal to a certain percentage of the amount borrowed from a bank under a line-of-credit or revolving credit agreement.

Accepted Answer

Compensating balance is indeed a checking account balance that borrowers are required to maintain equal to a certain percentage of the amount borrowed from a bank under a line-of-credit or revolving credit agreement.

Question 6

Jannet Company,currently pays its employees at the end of a week.The weekly payroll totals $400,000.If it were to extend the pay period so as to pay its employees 1 week later throughout an entire year,the employees would in effect be lending the firm ________ for a year.
A) $400,000
B) $20,800,000
C) $4,800,000
D) $675,000

Accepted Answer

By extending the pay period to pay its employees 1 week later throughout an entire year, the firm retains an additional $400,000 that it would otherwise pay out each week. This means at any given time during the year, the firm is holding onto an extra $400,000 that it would have paid to employees, effectively being lent this amount by the employees for the year. The total does not accumulate week over week because each week's delay is simply shifting the same $400,000 payment by one week throughout the entire year.

Question 7

An increment above the prime rate on a floating-rate loan will be higher than on a fixed-rate loan of equivalent risk because the lender bears higher risk with a floating-rate loan.

Accepted Answer

The increment above the prime rate on a floating-rate loan typically reflects the interest rate risk borne by the borrower rather than the lender, as the interest rate can fluctuate. In contrast, a fixed-rate loan locks in the interest rate, transferring interest rate risk from the borrower to the lender, potentially justifying a higher rate for equivalent risk due to the lender bearing this risk.

Question 8

Under a line of credit agreement,a bank may retain the right to revoke the line if any major changes occur in the firm's financial condition or operations.

Accepted Answer

This is true. Under a line of credit agreement, a bank has the right to monitor the borrower's financial condition and operations and can revoke the line if there are any major changes that could impact the borrower's ability to repay the loan.

Question 9

________ are liabilities for services received for which payment has yet to be made.
A) Notes payable
B) Accruals
C) Accounts payable
D) Accounts receivable

Accepted Answer

Accruals are expenses incurred but not yet paid for, such as wages and salaries earned by employees but not yet paid, interest on a loan that has yet to be paid, or rent for facilities used but not yet paid for. Notes payable are a form of long-term debt, accounts payable are amounts owed to suppliers for goods or services purchased, and accounts receivable are assets resulting from selling goods or services on credit.

Question 10

The risk-free rate is the lowest rate of interest charged by the nation's leading banks on business loans to their most important and reliable business borrowers.

Accepted Answer

The risk-free rate is the lowest rate of interest that can be earned on a financial instrument without any risk of loss, such as a U.S. Treasury bond. It is not related to loans given by leading banks to their top business borrowers.

Question 11

A discount loan is a loan on which interest is paid in advance by deducting it from the loan so that the borrower actually receives less money than is requested.

Accepted Answer

A discount loan is also known as a "deductible loan" or a "withholding loan." The interest is deducted from the loan amount upfront, so the borrower receives less than the requested amount.

Question 12

Unlike the spontaneous sources of unsecured short-term financing,bank loans are negotiated and result from deliberate actions taken by the financial manager.

Accepted Answer

Bank loans are a form of secured long-term financing that result from deliberate actions taken by the financial manager. They are not considered spontaneous sources of financing.

Question 13

Under a line of credit agreement,a bank may require an annual cleanup,which means that the borrower must pay off all its outstanding debts to all its operational creditors for a certain number of days during the year.

Accepted Answer

An annual cleanup in a line of credit agreement typically requires the borrower to fully pay down their outstanding balance on the line of credit to $0 for a certain period each year, not to pay off all outstanding debts to all operational creditors.

Question 14

Although more expensive than a line of credit,a revolving credit agreement can be less risky from the borrower's viewpoint.

Accepted Answer

A revolving credit agreement provides a fixed maximum amount of credit that can be used, and the borrower can borrow and repay as needed. This can be less risky for the borrower because the credit is pre-approved, allowing them to borrow as much or as little as needed without having to reapply for credit each time. However, it may be more expensive than a line of credit because of the interest rates and fees associated with it.

Question 15

Self-liquidating loans are intended merely to carry a firm through seasonal peaks in financing needs that are due primarily to buildups of accounts receivable and inventory.

Accepted Answer

Self-liquidating loans are specifically designed to finance short-term assets such as accounts receivable and inventory that can be quickly converted into cash, allowing the loan to be repaid within a short period of time. They are commonly used to manage periodic increases in working capital needs, such as during peak sales seasons.

Question 16

A single-payment note is a secured fund which can be obtained from a commercial bank when a borrower needs additional funds for a short period.

Accepted Answer

A single-payment note is an unsecured fund, meaning there is no collateral required.

Question 17

The effective interest rate on a bank loan depends on whether interest is paid when the loan matures or in advance.

Accepted Answer

The method of interest payments (whether in arrears or in advance) affects the effective interest rate of a loan. Interest paid in advance results in a higher effective interest rate compared to interest paid in arrears.

Question 18

A line of credit is an agreement between a commercial bank and a business,specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.

Accepted Answer

A line of credit is indeed an agreement between a commercial bank and a business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.

Question 19

A revolving credit agreement is a form of financing consisting of short-term,unsecured promissory notes issued by firms with a high credit standing.

Accepted Answer

A revolving credit agreement is a form of financing where a borrower is granted a line of credit and can borrow up to a certain amount, repay it, and then borrow again without having to reapply. It is typically secured by collateral and can be either long-term or short-term. It is not necessarily limited to firms with a high credit standing and may require a credit check or other qualifications for approval.

Question 20

Operating change restrictions are contractual restrictions that a bank may impose on a firm as part of a line of credit agreement.

Accepted Answer

Operating change restrictions are commonly included in line of credit agreements between banks and firms as a way for the bank to limit the firm's ability to make major changes to its operations without prior approval. This helps to mitigate the bank's risk and ensure that the firm is operating in a way that aligns with the terms of the credit agreement.

Quiz 15: Current Liabilities Management