Deck 9: Short-Term Debt

Question 1

According to the text,short-term debt arrangements means loans and instruments with maturity:

A) of a month.
B) up to six months.
C) up to a year.
D) between one year and two years.

Answer 1

C

Question 2

A company is likely to issue a bank bill if it wants:

A) long-term financing.
B) to spread its interest payments over the medium term.
C) short-term financing.
D) to invest medium-term funds.

Answer 2

C

Question 3

Which of the following statements about bank bills is NOT correct?

A) The interest rate on a bank bill is generally higher than on a bank overdraft.
B) The interest rate on a bank bill is generally lower than the yield on a Treasury note.
C) The interest rate on a bank overdraft is generally higher than the yield on a Treasury note.
D) The interest rate on a bank overdraft is generally higher than the yield on a Treasury bond.

Answer 3

B

Question 4

Trade credit can be regarded as:

A) finance offered by trading banks.
B) short-term debt.
C) medium-term debt.
D) long-term debt.

Question 5

When a company has a deal with a bank lender that allows access to short-term funds,this is called:

A) a debt facility.
B) a credit facility.
C) a debt provision.
D) a liability provision.

Question 6

The benchmark or prime rate of interest for overdrafts varies directly with:

A) demand for funds in the bond markets.
B) varying demand and supply for funds in the short-term markets.
C) varying demand and supply for funds in the long-term markets.
D) changing asset prices.

Question 7

The ________ is the benchmark rate of interest charged on loans to a business borrower by a bank.

A) prime rate
B) commercial paper rate
C) Treasury rate
D) overdraft rate

Question 8

If a company wishes to finance a printing press with a two-year life,it would be advisable to finance it:

A) with an overdraft.
B) by issuing a bank bill.
C) with the issue of commercial paper.
D) through its bill rollover facility.

Question 9

Which of the following statements about an overdraft facility is NOT correct?

A) Banks require an overdraft facility to be operated on a fully fluctuating basis.
B) Generally, the agreed interest rate on an overdraft is calculated by the bank on the balance at the end of the month.
C) The bank lender will charge an establishment fee to cover the establishment costs of an overdraft.
D) There is an unused limit fee that is much less than the actual overdraft interest rate.

Question 10

The annual cost of forgoing a cash discount under the terms of sale 2/30 n/90,assuming a 365-day year is:

A) 8.0%
B) 12.2%
C) 12.4%
D) 24.0%

Question 11

A company is offered credit terms of 2/10 n/40,but decides to forgo the cash discount and pay on the 45th day.What is the company's cost of forgoing the cash discount?

A) 18.6%
B) 21.28%
C) 24.83%
D) None of the given answers

Question 12

A supplier who changes its trade credit from 3/10 n/30 to 4/15 n/40 is likely to find:

A) its accounts receivable decrease.
B) its risk of bad debts reduces.
C) its accounts receivable increase.
D) a decrease in sales.

Question 13

When a business wants to smooth out the timing of its monthly mismatch between cash inflows and outflows and day-to-day working capital requirements,it usually:

A) issues bank bills.
B) arranges a bank overdraft facility.
C) issues a debenture.
D) issues commercial paper.

Question 14

The basic feature of a/an ________ required by some banks is that it effectively raises the interest cost to the borrower for an overdraft facility.

A) operating change restriction
B) compensating balance
C) commitment fee
D) annual cleanup

Question 15

If a company has a good credit standing with a bank,it will be charged ______ interest rate margin than/as a company without an established record.

A) a higher
B) a lower
C) a much higher
D) the same

Question 16

A facility offered by many suppliers of goods that provide for the purchase of goods with a specified period before the account must be paid for is called:

A) supplier credit.
B) bank overdraft.
C) trade credit.
D) purchaser credit.

Question 17

A 2/15,n/30 date of invoice translates as:

A) a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in 30 days after the middle of the month.
B) a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the invoice date.
C) a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the end of the month.
D) a 2% cash discount may be taken on 15% of the purchase if the account is paid within 30 days after the end of the month.

Question 18

When a company provides goods to a purchaser with payment at the end of the month,this is called.

A) factoring.
B) revolving credit.
C) trade credit.
D) supplier credit.

Question 19

When a company finances its short-term assets with short-term debt,this is known as the:

A) identical principle.
B) equalisation theory.
C) corresponding principle.
D) matching principle.

Question 20

Which of the following rates serves as a reference interest rate in the United Kingdom?

A) BBSW
B) LIBOR
C) USCP
D) SIBOR

Question 21

In relation to a commercial bill,the acceptance fee is the:

A) discounter's fee for taking on the risks associated with discounting the bill.
B) fee for drawing up the bill.
C) fee for taking the liability for paying the holder at maturity.
D) drawer's fee for taking on the risks associated with drawing the bill.

Question 22

With a bank-accepted bill rollover facility the:

A) borrower agrees to accept bills drawn by the bank up to a specified limit.
B) borrower agrees to accept bills drawn by the bank up to an unspecified limit.
C) bank agrees to accept bills drawn by the borrower up to a specified limit.
D) The bank agrees to accept, discount and rollover bills at a fixed interest rate up to a year.

Question 23

When a party endorses a bank bill,it:

A) repays the face value of the bill to the holder at maturity.
B) creates a liability for payment of the bill.
C) provides the funds to the seller.
D) provides the funds to the discounter of the bill.

Question 24

Upon maturity,the final holder of the bill approaches the _________ for payment.

A) drawer
B) acceptor
C) endorser
D) discounter

Question 25

Which of the following statements about bank bills is incorrect?

A) The drawer is the party that issues the bill.
B) The acceptor is the party that has primary liability to repay the face value of the bill.
C) The payee is the party that receives the borrowed funds when the bill is initially issued.
D) The discounter is the party that repays the acceptor at maturity.

Question 26

A major advantage of a bill financing facility is that it:

A) lowers the acceptor's fees for a bank bill.
B) lowers the drawer's cost in drawing up the bill.
C) allows businesses to access financing at a lower cost than overdrafts.
D) lowers the discounter's fee for taking on risks associated with the bill.

Question 27

Which of the following statements about bills is incorrect?

A) There is an active secondary market in bank-accepted bills.
B) Once a bill has been discounted into the marketplace, the cost of funds will vary for the issuer.
C) The drawer has a liability with a bank-accepted bill to pay face value to the acceptor bank.
D) At maturity for a bank-accepted bill, the acceptor will pay face value to the holder.

Question 28

What is a bill of exchange either accepted or endorsed by a bank called?

A) A commercial bill
B) A bank bill
C) A trade bill
D) A negotiable bill

Question 29

Which of the following statements is correct?

A) A bank bill is a negotiable instrument.
B) A bank-accepted bill is regarded by market participants as equivalent to a bank-endorsed bill.
C) The issuer of the bank-accepted bill will repay the holder of the bill directly at maturity.
D) The issuer of a bank-endorsed bill has to pay regular interest payments to the holder, unlike with a bank-accepted bill.

Question 30

The _______ is the party that lends the funds in a commercial bill transaction.

A) acceptor
B) discounter
C) drawer
D) endorser

Question 31

With regard to a rollover bill financing facility:

A) the bank agrees to sell commercial bills drawn by the borrower for unspecified amounts.
B) the bank agrees to sell commercial bills drawn by the borrower up to a specified limit.
C) the discounter agrees to sell commercial bills drawn by the borrower up to a specified limit.
D) none of the given answers are correct.

Question 32

Compared to other forms of business finance such as term loans,bill financing offers:

A) the advantages of lower costs for the bank not having to fund the bill on its balance sheet.
B) disadvantages for the bank due to the issue fees involved.
C) higher costs due to the lack of collateral.
D) lower flexibility for the bank.

Question 33

In relation to a bank bill,endorsement means:

A) that the acceptor and endorser make an agreement as to who is liable for the repayment of the face value to the final holder of the bill.
B) if the acceptor cannot repay the face value to the holder at maturity, it must draw a bill to meet its obligations.
C) the endorser has a contingent liability when the bill matures.
D) the drawer agrees to pay an additional fee to the acceptor for guaranteeing the repayment.

Question 34

Which of the following statements regarding a bank bill is correct?

A) A bank bill is not usually endorsed after it is sold for the second time in the secondary market.
B) Once a bank becomes an acceptor for a bill other financial institutions can buy and accept the same bank bill.
C) A bank bill may be both bank-accepted and bank-endorsed.
D) A bank-accepted bill tends to trade at slightly higher yields than bank-endorsed bills.

Question 35

Which of the following about bank bills is incorrect?

A) For a bank bill, the drawer has the secondary liability to pay the holder of the bill at maturity.
B) A commercial bank generally carries out the role of an acceptor on a bill.
C) With a bank as an acceptor, it makes it easier to sell the bill at a higher yield.
D) When the discounter discounts the face value of the bill they provide the funds to the borrower.

Question 36

For a commercial bill,the interest rate is quoted as a/an:

A) annual percentage rate.
B) rate based on its maturity.
C) effective rate.
D) holding period yield.

Question 37

Which maturity date is NOT likely for a bank bill?

A) 30 days
B) 90 days
C) 180 days
D) 360 days

Question 38

Which of the following statements about the issuing of a commercial bill is incorrect?

A) Commercial bills are sold at discount to face value.
B) A bank may accept a commercial bill.
C) The drawer is the party that issues the commercial bill.
D) The discounter is the party that borrows the funds.

Question 39

The process of discounting a commercial bill means:

A) a buyer for the bill will provide the financing.
B) a seller for the bill will provide the financing.
C) the borrower has a specified time in which to repay the loan.
D) the acceptor agrees to pay the face value of the bill to the holder at maturity.

Question 40

Which of the following about bank bill financing facility is incorrect?

A) A bill rollover facility is an arrangement whereby the bank agrees to accept and discount new commercial bills for an issuer at each maturity date.
B) The yield at which the bill is discounted depends partly on the credit rating of the party that incurs the liability.
C) The bank agrees to discount bills up to the agreed amounts with a fixed yield over the life of the rollover facility.
D) Bills issued via a rollover facility incorporate the higher credit standing of the bank acceptor.

Question 41

Which one of the following statements is true?

A) Promissory notes are sold with contingent liability in the secondary market.
B) Both commercial bills and promissory notes are sold with contingent liability in the secondary market.
C) Commercial bills are sold with contingent liability in the secondary market, whereas promissory notes are sold without contingent liability.
D) Promissory notes and commercial bills are both sold without contingent liability in the secondary market.

Question 42

Which one of the following statements is true?

A) As a promissory note is a one-name paper, only the buyer is required to endorse it.
B) If a bank agrees to accept it, a corporation can issue a promissory note.
C) Usually, initial buyers of promissory notes hold them until maturity.
D) Typically, a promissory note will be issued for 90 days.

Question 43

A company has decided to issue a 120-day bank-accepted bill to raise additional funding of $250 000 to buy equipment.If the bank has agreed to discount the bill at a yield of 7.65% per annum,what will be the face value of the bill?

A) $230 875
B) $250 000
C) $256 287.67
D) $312 876.71

Question 44

What is the discount rate of a 120-day bank bill with a face value of $100 000 and currently selling for $95 234,with a full 120 days to run?

A) 13.93%
B) 14.50%
C) 15.22%
D) 16.58%

Question 45

Compared with bill financing,commercial paper financing offers a large creditworthy company:

A) higher costs because of the need for collateral.
B) higher costs owing to the acceptance fee involved.
C) lower costs owing to no contingent liability when sold on.
D) lower costs owing to lower bank fees.

Question 46

When compared with bank bills,commercial paper has the advantage:

A) that no interest is paid until maturity, unlike for a bank bill.
B) that a holder of commercial paper has no contingent liability when selling in the money markets.
C) that an issue of commercial paper often has a rollover facility attached, unlike for bank bills.
D) of greater liquidity in the secondary market.

Question 47

A company wants to invest some surplus short-term funds and plans to buy a 180-day bank bill with a face value of $100 000.What is the yield on the bill if its price is currently $94 234?

A) 11.69%
B) 12.41%
C) 13.23%
D) 13.32%

Question 48

A company issues a 90-day bill with a face value of $100 000,yielding 7.65% per annum.What amount would the company raise on the issue?

A) $84 130.46
B) $92 350.21
C) $98 123.39
D) $98 148.62

Question 49

When underwriting a commercial paper issue,an investment bank's fee will usually be:

A) 10% per annum.
B) 1% per annum.
C) 0.1% per annum.
D) 0.01% per annum.

Question 50

When issuing commercial paper,it is important for a company to have:

A) a party to act as an acceptor and guarantee payment.
B) collateral to attach to the issue.
C) a well-established reputation in the markets.
D) investors organised by the investment bankers to sell the issue.

Question 51

Commercial paper is generally sold at a discount from:

A) the prime rate.
B) its face value.
C) its cost.
D) Treasury notes.

Question 52

A holder of a 180-day bill with 60 days left to maturity and a face value of $100 000 chooses to sell it into the market.If 60-day bills are currently yielding 6.8% per annum,what price will be obtained?

A) $81 728.61
B) $89 945.79
C) $97 813.27
D) $98 894.55

Question 53

________ is a short-term,unsecured discount note issued by corporate borrowers of high credit standing.The major banks generally issue these notes on their behalf.

A) A line of credit
B) Commercial paper
C) A revolving line of credit
D) A fully drawn advance

Question 54

Promissory notes have a decided advantage over bills in that:

A) they are liquid.
B) an issuer of a promissory note does not incur a contingent liability.
C) a borrower without a strong name in the markets does not need bank endorsement.
D) sole liability to repay the face value at maturity belongs to the underwriting bank(s).

Question 55

Which financial security is known as one-name paper?

A) Bank bills
B) CDs
C) Promissory notes
D) Unsecured notes

Question 56

Commercial paper is usually issued in multiples of:

A) $1000 or more
B) $10 000 or more
C) $100 000 or more
D) $1 000 000 or more

Question 57

Which of the following statements is NOT a feature of promissory notes?

A) They are issued at discount to face value.
B) A typical P-note facility issue program is a revolving facility.
C) A company may pay an additional fee to the underwriter for endorsing the issue as well.
D) Only the largest and most creditworthy corporations issue P-notes.

Question 58

Which of the following statements about promissory notes is incorrect?

A) Promissory notes are discount securities.
B) P-notes are issued by corporations in all the major international financial markets.
C) P-notes have no acceptor, only an endorser.
D) P-notes are usually issued as unsecured instruments.

Question 59

The term 'discount security' in relation to a bank bill means:

A) when the bank bill is issued, it is less than the principal amount to be repaid at maturity.
B) the interest on a bank bill is less than other money market securities.
C) when the principal is repaid to the lender, they receive less than other money market securities.
D) the bank bill only pays interest annually, unlike other securities that pay semi-annually.

Question 60

A bill of exchange differs from a promissory note in that:

A) only promissory notes have an active secondary market.
B) a promissory note is a short-term instrument, whereas a bill of exchange is not necessarily short-term.
C) there is generally an issuer and an acceptor for a bill of exchange, whereas there is no acceptor involved for a promissory note.
D) bills of exchange are only used for trade transactions.

Question 61

As an alternative to issuing a commercial bill for short-term financing,corporations with an excellent credit standing may:

A) buy commercial paper.
B) issue commercial paper.
C) issue preference shares.
D) issue convertible notes.

Question 62

A negotiable certificate of deposit:

A) is a term deposit because it has a specified maturity date.
B) can be issued by banks to meet their operational liquidity.
C) is a short-term discount security.
D) is all of the given answers.

Question 63

A commercial paper issue where dealers bid competitively for the paper is a/an:

A) tap issuance.
B) tender.
C) offer.
D) proposition.

Question 64

Negotiable certificates of deposit:

A) pay interest, as they are interest-bearing accounts at a bank.
B) are short-term securities, issued by banks for financing purposes.
C) have a longer maturity date than promissory notes.
D) have little liquidity in the secondary market.

Question 65

If a company wished to invest funds in the short term,it could:

A) issue a commercial bill.
B) issue a promissory note.
C) buy a negotiable certificate of deposit.
D) buy a promissory note.

Question 66

Which of the following about a P-note issue program is incorrect?

A) A P-note issue program is a rollover facility whereby as P-notes mature, new notes are issued and discounted.
B) A P-note program generally will have a lead manager.
C) When members of the dealer panel bid for the paper, bids are generally quoted to a margin over a specified benchmark.
D) The typical P-note issue program is a revolving facility with the dealer having the right to cancel, subject to providing the issuer with the required notice.

Question 67

The most important function of an underwriter for a promissory note issue is to:

A) provide funding for the corporation.
B) approve the prospectus before distribution to the public.
C) dilute the corporation's equity.
D) buy the issue of securities from the corporation and resell it to investors.

Question 68

Where a company wants to guarantee all of its issue of commercial paper,it can arrange for it to be:

A) sold by tender.
B) underwritten.
C) sold by tap.
D) sold with a face value less than $10 000.

Question 69

One of the advantages to the corporation of an underwriting syndicate for the issue of promissory notes is:

A) they approve the prospectus before distribution to the public.
B) the syndicate submits a combined bid for purchase that the corporation compares with other bids.
C) the syndicate monitors and coordinates the actions of the different underwriters.
D) the underwriting commitment gives the corporation access to a line of credit extending beyond the life of the promissory note.

Question 70

When a bank needs funds for day-to-day operational liquidity requirements it may issue:

A) bank bills.
B) CDs.
C) CP.
D) P-notes.

Question 71

The interest rate charged on an unsecured short-term P-note to a company is generally ________ the interest rate on a secured loan.

A) lower than
B) the same as
C) higher than
D) unrelated to

Question 72

As part of their liability management,banks sell which financial instrument?

A) Bank bill
B) Commercial paper
C) Certificate of deposit
D) Promissory note

Question 73

The role of a lead manager for a promissory note issuance program is to:

A) provide the funds to the issuer.
B) act as an arranger of the debt issue.
C) act as an underwriting syndicate and purchase paper not taken up by the market.
D) provide a supporting guarantee for the issue.

Question 74

When an issuer of commercial paper issue fails to raise the funds,this most likely means the:

A) company is in default.
B) issue is underpriced.
C) underwriter must purchase unsold notes.
D) issuer must establish a rollover facility for the remaining notes.

Question 75

As an alternative to issuing a commercial bill for short-term funds,a corporation may:

A) buy a promissory note.
B) issue a convertible note.
C) use the overdraft facility of investment bank.
D) issue a negotiable certificate of deposit.

Question 76

The major banks lend unsecured short-term funds in the following basic ways:

A) overdraft, bill financing and commercial paper.
B) overdraft and bill financing.
C) overdraft and commercial paper.
D) commercial paper, negotiable certificates of deposit and overdraft.

Question 77

A revolving facility for a promissory note issue usually:

A) has a lead manager to organise the issuance.
B) offers corporations funding for 180 days.
C) gives the issuer the right to cancel the program, subject to 90 days' notice.
D) has only an underwriter.

Question 78

A company has directly placed an issue of commercial paper that has a maturity of 90 days,with a face value of $100 000 yielding 8.25% per annum.What amount would the company raise on the issue?

A) $83 096.19
B) $91 750.00
C) $97 965.75
D) $98 006.31

Question 79

Which of the following about P-notes is incorrect?

A) Commercial paper issued in the euromarkets uses a 360-day convention.
B) The credit rating of a P-note issuer needs to be investment grade.
C) A dealer panel is chosen on their ability to distribute the paper to the market.
D) If the lead manager has arranged a tender panel, then the members of the panel do not have any obligation to buy.

Question 80

A P-note issuer to guarantee all the funds may arrange for:

A) an underwriter.
B) a supporting guarantee.
C) collateral for the issue.
D) all of the given choices.