Question 1

The outright sale of accounts receivable at a discount in order to obtain funds is called pledging accounts receivable.

Accepted Answer

The correct term for the process described is factoring accounts receivable. Pledging accounts receivable involves using them as collateral for a loan, but the company still retains ownership of the receivables.

Question 2

A U.S.-based company that exports goods and has accounts receivable denominated in a foreign currency ________.

Accepted Answer

As a U.S.-based company with accounts receivable in a foreign currency, the company faces the risk that the U.S. dollar will appreciate in value relative to the foreign currency. This means that when the foreign currency is converted to U.S. dollars, the company will receive fewer dollars than they would have if the exchange rate had remained the same or lowered. The risk is that their profits will be impacted negatively.

Question 3

The security agreement is an agreement between the borrower and the lender that specifies the collateral held against a secured loan.

Accepted Answer

A security agreement is a legal document between the borrower and lender that specifies the collateral held against a secured loan.

Question 4

Fixed assets are the most desirable short-term-loan collateral since they normally have a longer life,or duration,than the term of the loan.

Accepted Answer

Fixed assets are not the most desirable short-term-loan collateral because their longer life and potential difficulty in liquidation make them less suitable for short-term loans, which typically prefer more liquid assets as collateral.

Question 5

A firm has directly placed an issue of commercial paper that has a maturity of 60 days.The issue sold for $980,000 and has an annual interest rate of 12.24 percent.The value of the commercial paper at maturity is ________ (assume 360 days in a year).

Accepted Answer

The value of the commercial paper at maturity can be calculated as:
Value of commercial paper = Face value + (Face value x annual interest rate x time period)
Time period = 60/360 = 1/6 years
Value of commercial paper = $980,000 + ($980,000 x 0.1224 x 1/6) = $1,000,000

Question 6

A letter written by a company's bank to the company's foreign supplier,stating that the bank will guarantee payment of an invoiced amount if all the underlying agreements are met is called ________.

Accepted Answer

A letter of credit is a letter written by a company's bank to the company's foreign supplier, stating that the bank will guarantee payment of an invoiced amount if all the underlying agreements are met. This serves as a form of insurance for both the supplier and the company, ensuring that payment will be made and goods will be delivered as agreed upon.

Question 7

The interest rate charged on secured short-term loans is always equal to the rate on unsecured short-term loans.

Accepted Answer

The interest rate on secured short-term loans is generally lower than that on unsecured loans because the lender has collateral to fall back on if the borrower defaults on the loan.

Question 8

Factoring accounts receivable is not a form of secured short-term borrowing.It entails the sale of accounts receivable at a discount to obtain the required short-term funds.

Accepted Answer

Factoring accounts receivable involves selling the accounts receivable at a discount, and therefore it is not a form of secured short-term borrowing.

Question 9

Pledges of accounts receivable are normally made on a nonnotification basis,meaning that a customer whose account has been pledged as collateral is not notified.

Accepted Answer

Pledges of accounts receivable are commonly made on a nonnotification basis, which means that the customer whose account has been pledged as collateral is not informed.

Question 10

The higher cost of unsecured as opposed to secured borrowing is due to the greater risk of default.

Accepted Answer

The answer of The higher cost of unsecured as opposed...

Question 11

Lenders recognize that holding collateral can reduce losses if the borrower defaults,but the presence of collateral has no impact on the risk of default.

Accepted Answer

The answer of Lenders recognize that holding collateral can reduce...

Question 12

Commercial finance companies usually charge a higher interest on secured short-term loans than commercial banks because the finance companies generally ends up with higher-risk borrowers.

Accepted Answer

Commercial finance companies typically provide financing to small and medium-sized enterprises with less established credit histories or lower credit scores, making them more likely to default on loans. This higher risk results in finance companies charging a higher interest rate to compensate for the increased likelihood of default. Commercial banks, on the other hand, are more likely to lend to companies with a stronger credit history, resulting in lower interest rates.

Question 13

Tangshan Mining issued $1,000,000 of commercial paper for $992,500 for 45 days.Based on this information,the effective annual rate of interest on the commercial paper would be ________ (assume 360 days in a year).

Accepted Answer

Step 1: Calculate the discount: 
discount = $1,000,000 - $992,500 = $7,500

Step 2: Calculate the discount rate: 
discount rate = discount / face value = $7,500 / $1,000,000 = 0.0075

Step 3: Calculate the simple interest rate for 45 days: 
simple interest rate = discount rate / (days / year) = 0.0075 / (45 / 360) = 0.0075 / 0.125 = 0.06

Step 4: Convert the simple interest rate to an effective annual rate: 
effective annual rate = (1 + simple interest rate)^(365/days) - 1 = (1 + 0.06)^(365/45) - 1 = 0.062 = 6.20%

Therefore, the effective annual rate of interest on the commercial paper is 6.20%, or Answer B.

Question 14

Pledges of accounts receivable are never made on a notification basis because the lender does not trust the borrower to collect the pledged account receivable and remit these payments as they are received.

Accepted Answer

Pledges of accounts receivable are frequently made on a notification basis, giving the borrower responsibility for collecting and remitting the pledged accounts receivable.

Question 15

Tina's Apple Company would like to manufacture and market a new packaging.Tina's has sold an issue of commercial paper for $1,500,000 and maturity of 90 days to finance the new project.Compute the annual interest rate on the issue of commercial paper if the value of the commercial paper at maturity is $1,650,000 (assuming 360 days in a year).

Accepted Answer

The answer of Tina's Apple Company would like to manufacture...

Question 16

One advantage of factoring accounts receivable is the ability it gives a firm to turn accounts receivable immediately into cash without having to worry about repayment.

Accepted Answer

Factoring accounts receivable involves selling them to a third-party at a discounted rate in exchange for immediate cash. This means the firm no longer has to worry about collecting the money from the customers themselves and can use the cash for other purposes.

Question 17

Secured short-term financing has specific assets pledged as collateral.

Accepted Answer

Secured short-term financing requires specific assets to be pledged as collateral to the lender. If the borrower defaults, the lender can take possession of the collateral to recover their losses.

Question 18

Commercial finance companies are lending institutions that make only unsecured loans-both short-term and long-term-to businesses.

Accepted Answer

Commercial finance companies may make secured loans as well as unsecured ones.

Question 19

A floating inventory lien is a lender's claim on the borrower's general inventory as collateral for a secured loan.

Accepted Answer

A floating inventory lien is a type of security interest that allows a lender to claim a borrower's inventory as collateral for a loan, without specifying exactly which items of inventory are included. This allows the borrower to continue buying and selling inventory without having to obtain the lender's permission for each transaction. The lien "floats" over the inventory, attaching to whatever items the borrower has on hand at any given time.

Question 20

Bessey Aviation has just sold an issue of 30-day commercial paper with a face value of $5,000,000.The firm has just received $4,958,000.What is the effective annual interest rate on the commercial paper?

Accepted Answer

The answer of Bessey Aviation has just sold an issue...

Quiz 15: Current Liabilities Management